When it comes to evaluating non-rated securities, our in-house credit team, led by Rich Stein, employs stringent credit criteria designed to help mitigate the asset class's inherent risks, and it remains focused on the ultimate outcome even when faced with new headline risk. To the benefit of long-term shareholders, the team's willingness to search the far corners of the muni market and to fight for the best-possible outcomes, no matter what befalls a given security, has helped establish our funds as strong, yield-focused competitors in what is often called a plain vanilla market.
- In 2009, St. Mary’s Hospital for Children needed a new facility in Queens, New York to treat medically fragile children whose conditions require more care than a traditional nursing home could provide but less than would be available at a typical acute-care hospital. Four of our funds – Oppenheimer Rochester AMT-Free Municipal Fund (OPTAX), Oppenheimer Rochester AMT-Free New York Municipal Fund (OPNYX), Oppenheimer Rochester Fund Municipals (RMUNX), and Oppenheimer Rochester High Yield Municipal Fund (ORNAX) – bought 100% of the $102 million bond in a private placement, one of our biggest. The bonds carried construction risk and also increased the financial leverage of the hospital, which already had a weak credit profile. As a result, the bonds had a 7.875% coupon at a time when interest rates in the U.S. were much lower. Over the years, donations and the demand for services have grown considerably, and the credit quality of our holdings has steadily improved; the roster of generous donors includes the multi-talented entertainer Nick Cannon, who is on the board and frequently visits the kids in Queens. It’s not every day that a shareholder or credit analyst can claim 6 degrees of separation from a superstar.
- In 2007, Oppenheimer Rochester California Municipal Fund (OPCAX) purchased a portion of the TIF (Tax Increment Financing) bonds that are secured by incremental property tax revenues from a 1,230-acre TIF district in Riverbank, a primarily residential community near Modesto. The assessed valuation of the district – and thus its TIF revenues – declined sharply during California’s housing crisis, and the bonds incurred a payment default in 2012. Based on our credit work and our understanding of housing market cycles, we fully expected the district’s assessed value to rise, which it began to do in 2016. Debt-service payments resumed in 2017, all past due interest has been received, and principal payments to date have now surpassed those initially projected.
Well-researched securities, we believe, are central to the value proposition at Oppenheimer Rochester.
For additional examples of how solid credit analysis can benefit muni investors, read the full sector story in the 2018 Annual Overview.
It should not be assumed that an investment in the securities identified will be profitable.
Fixed income investing can entail credit and interest rate risks; as interest rates rise, bond prices generally fall and a fund’s share price can fall, too. A portion of a municipal bond fund’s distributions may be subject to tax and may increase taxes for investors subject to federal alternative minimum tax. Capital gains distributions are taxable as capital gains.
Below-investment grade (“high yield” or “junk”) bonds are more at risk of default and are subject to liquidity risk. Under certain market conditions, some unrated securities may trade less actively than rated securities. Our funds can have a relatively high portion of their portfolio holdings in particular segments of the municipal securities market, such as tobacco bonds or real-estate-related securities. They may also invest substantially in municipal securities within a single state or related to similar type projects, which can increase volatility and exposure to regional issues. Funds may also invest substantially in Puerto Rico and other U.S. territories, commonwealths and possessions, and could be exposed to their local political and economic conditions. Deterioration of the Puerto Rican economy could have an adverse impact on Puerto Rican bonds and the performance of the Rochester municipal funds that hold them. Diversification does not guarantee profit or protect against loss.