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Rochester Communique



Oppenheimer Rochester on Puerto Rico Downgrades: An Update

February 12

The three Nationally Recognized Statistical Rating Organizations (NRSROs) – Standard & Poor’s, Moody’s Investors Service and Fitch Ratings – have each downgraded the general obligation debt and certain other securities issued by Puerto Rico and related issuers to below investment grade with a negative outlook.

The NRSROs’ decisions do not change Oppenheimer Rochester’s current opinion of the credit risk of Puerto Rico and its various public authorities, or our philosophy of seeking to provide tax-advantaged income to fund shareholders. As always, we are assessing the creditworthiness of individual securities, focusing on news and market developments, and managing the funds in the best interests of our shareholders.

While lower-rated bonds tend to be less liquid and more volatile than investment-grade bonds, thus far trading in Puerto Rico securities has continued to be liquid since S&P’s announcement last week. The Funds’ prospectuses do not require the Funds to sell Puerto Rico holdings as a result of these downgrades. However, the funds’ credit breakdowns will be adjusted to reflect these downgrades, which will likely cause certain funds that have prospectus limitations on below-investment-grade holdings to exceed those thresholds, in certain cases, significantly and possibly for an extended period of time.* An Oppenheimer Rochester municipal bond fund cannot purchase additional below-investment-grade bonds until its holdings of below-investment-grade bonds are once again below its threshold.

The Oppenheimer Rochester investment team continues to believe that the Commonwealth is moving in the right direction, and that the Puerto Rico securities held by our funds have provided high value to our shareholders relative to the risk they incur.

Clearly, there is room for improvement in Puerto Rico: Unemployment is high, more needs to be done to improve tax collections, the public payroll remains large, migration is on the rise, investors are demanding higher yields on bonds. However, we disagree with many of the assessments as to the impact of these conditions.


  • Puerto Rico continues to show a very strong willingness to pay bondholders. Additionally, our credit research shows that coverage ratios are sufficient and legal protections remain strong for the bonds we hold.

  • The income generated by the island’s muni bonds is exempt from all federal, state and local income tax.

  • Neither Puerto Rico nor any of its municipalities or agencies may file for Chapter 9 bankruptcy protection.

  • The Commonwealth’s Constitution requires that general fund revenues be used to pay the debt service on general obligation (G.O.) and guaranteed debt ahead of any other government expenses. Concurrent with its decision to downgrade, Fitch made the following observation: “Puerto Rico’s G.O. pledge is unusually strong … Current management has repeatedly shown its ability and willingness to take quick action to address financial challenges and external market concerns.”

  • The current governor, Alejandro García Padilla, and his predecessor have made significant progress that we believe will result in long-lasting fiscal and economic improvement. The budget deficit has been reduced from $3.3 billion on June 30, 2009, to an estimated $650 million as of June 30, 2104. Approximately $1.4 billion in additional taxes are included in the current budget, and we believe that the government’s successful pension reform efforts, among other initiatives, will result in long-term saving. Additionally, the governor has publicly announced that he will present a balanced budget for fiscal year 2015 beginning July 1, 2014.

  • The securities issued by a wide range of quasi government-owned businesses and agencies are backed by each agency’s own revenue stream. The island’s utility authorities can raise rates – and have done so – without first gaining regulatory approval.

There are many different opinions about Puerto Rico debt, and we encourage investors to consider all the opinions and facts before making any investment decision. As market observers, the rating agencies are entitled to their opinions. As investors, we continue to find attractive opportunities in the marketplace for Puerto Rico bonds.

The prospectuses for all 20 of the Oppenheimer Rochester municipal bond funds were supplemented February 11, 2014 to reflect that certain securities issued by Puerto Rico and its agencies are currently considered below investment grade and the funds may be subject to additional risks. In the coming weeks, months and quarters, there are likely to be further developments related to Puerto Rico and the ratings for its debt. The Rochester team is committed to keeping investors informed and will do so online, on Twitter and in fund literature. The OppenheimerFunds’ blog has additional information about the agencies’ decisions to downgrade Puerto Rico securities.

While we are confident in our research, investors should understand the applicable risks, including the potential decline of both principal value and income generation, in the event of a default by any issuer. We continue to believe that Puerto Rico-based issuers of municipal bonds, including the government, are unlikely to default.

* The prospectus limitations are 5% of total assets for our managed maturity funds and 25% of total assets for our longer-term funds; there is no limit on the percentage of below-investment-grade securities for Oppenheimer Rochester High Yield Municipal Fund, formerly named Oppenheimer Rochester National Municipals.


Fixed income investing entails credit and interest rate risks. Interest rate risk is the risk that rising interest rates, or an expectation of rising interest rates in the near future, will cause the values of a Fund’s investments to decline. Risks associated with rising interest rates are heightened given that rates in the U.S. are at, or near, historic lows. When interest rates rise, bond prices fall and a fund’s share price can fall. Municipal bonds are subject to default on income and principal payments. Further, a portion of some funds’ distributions may be taxable and may increase alternative minimum tax (AMT) for investors subject to that tax; distributions from net realized capital gains are taxable as capital gains.

The funds invest in below-investment-grade debt securities, which may entail greater credit risks, as described in each fund’s prospectus. These securities (sometimes called “junk bonds”) may be subject to greater price fluctuations and risks of loss of income and principal than investment-grade municipal securities. The funds may invest substantially in municipal securities within a single state or related to similar type projects, which can increase volatility and exposure to regional issues. The 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.

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Oppenheimer Rochester announces name changes on 6 funds

November 27, 2013

Please be aware of the following name changes to the Oppenheimer Rochester municipal bond fund lineup:

  • Rochester National Municipals has changed to Oppenheimer Rochester High Yield Municipal Fund
  • Oppenheimer AMT-Free Municipals has changed to Oppenheimer Rochester AMT-Free Municipal Fund
  • Oppenheimer California Municipal Fund has changed to Oppenheimer Rochester California Municipal Fund
  • Oppenheimer Limited Term California Municipal Fund has changed to Oppenheimer Rochester Limited Term California Municipal Fund
  • Oppenheimer New Jersey Municipal Fund has changed to Oppenheimer Rochester New Jersey Municipal Fund
  • Oppenheimer Pennsylvania Municipal Fund has changed to Oppenheimer Rochester Pennsylvania Municipal Fund

This change is effective as of November 27, 2013, and will be noted in the new prospectus as of the same date.

We changed the name of these funds to better align the full Oppenheimer Rochester suite of municipal bond funds.

Please note that the old name may continue to appear on marketing material in the near future, while we update all of our literature.

We thank you for your patience and, as always, invite you to bring any questions to our attention.

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Tobacco bond trustees in Ohio plan to tap reserves. We focus on yields, which are smokin'

November 7, 2013

In Ohio, bond trustees plan to tap liquidity reserves in the amount of $14.4 million to help fund Buckeye Tobacco Bond interest payments due on December 1, 2013. Officials have said that all $148,455,396 of interest payments due on these bonds will be made, and no payments will be missed. The bonds are backed by state proceeds from the 1998 Master Settlement Agreement. All bondholders get official notices of these transactions and, understandably, some questions may arise.

To that end, a quick review of the situation: Like the debt service reserve on other municipal bonds, the liquidity reserves on these tobacco bonds serve as collateral that is purposely set aside to cover any payment shortfalls that may arise. The amount that trustees plan to access is about 3.9% of available reserves. While the liquidity reserve will remain substantial at $369.3 million, it is currently underfunded by nearly $20 million.

Ohio was among the states recently determined to have diligently enforced terms of the Master Settlement Agreement in the last round of arbitrations over the non-participating manufacturers adjustment. As of now, we expect that Ohio will receive payment for the amounts previously escrowed under this adjustment on or about April 15, 2014. The underfunding of the liquidity reserve will be addressed at that time.

As bondholders, we continue to like the high levels of tax-free income that tobacco bonds are generating. Tobacco bond debt service has availed our investors of an attractive stream of income for more than 14 years. While this news may result in some short-term price volatility for tobacco bonds, any volatility may create attractive buying opportunities.

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Why the tobacco ruling was good news

November 5, 2013

On September 11, 2013, a three-judge arbitration panel issued a long-awaited ruling about a 2003 Master Settlement Agreement (MSA) payment dispute. At issue was whether States had diligently enforced the MSA and whether the States or the participating manufacturers were entitled to the 2003 non-participating manufacturer (NPM) adjustments. [Note: “States” refers to the geographic entities that signed the tobacco Master Settlement Agreement in 1998. The “States” include all 50 states (with the exception of Florida, Minnesota, Mississippi and Texas), the District of Columbia and five U.S. territories.]

While the disputes of many States had been settled by a separate agreement before the panel’s ruling was released, the disputes related to 15 States – including 5 States that sell “tobacco bonds” – were resolved through arbitration. The panel ruled that these five States – Illinois, Iowa, New York, Ohio and Washington – had diligently enforced the MSA and were thus entitled to the disputed NPM adjustments.

This ruling triggered a rally in “tobacco bonds” and represented good news for investors in these securitized MSA payments. As of September 30, 2013, none of the Rochester funds held “tobacco bonds” issued by Illinois; several Rochester funds were invested in “tobacco bonds” from Iowa, New York, Ohio and/or Washington as of the September date.

The arbitration panel also decided how the remaining disputes about 2003 NPM adjustments would be resolved for 10 States that had been contested but had not issued “tobacco bonds.”

  • Four of the 10 were found to have diligently enforced the MSA. They are Colorado, Maine, North Dakota and Oregon, none of which has “tobacco bonds.”
  • The other six – Indiana, Kentucky, Maryland, Missouri, New Mexico and Pennsylvania – were found to have failed to diligently enforce the MSA. Because none of these 10 States had issued “tobacco bonds,” we believe the ruling should remain market neutral. The latter six States, however, will face financial repercussions as a result of the panel’s ruling.

A quick review: The tobacco MSA, a landmark agreement, was reached in 1998 between four U.S. tobacco manufacturers and 52 States, a figure that includes 46 of the 50 states, the District of Columbia and five U.S. territories (aka “the States”); after the initial agreement, more than 25 additional manufacturers signed on. The States sought – and gained via the MSA – relief from some of the legal liabilities for tobacco-related illnesses and healthcare. The participating manufacturers agreed to make substantial initial payments and annual payments in perpetuity to the States, and to limit their marketing, advertising and lobbying activities. The panel’s decision involved a disputed amount of the 2003 MSA payments, the non-participating manufacturer adjustments.

A narrow scope: Of the 52 States covered by the MSA, it should be noted, not all were within the arbitration panel’s purview. Seventeen States, for example, were not contested by the participating manufacturers, including seven that had issued “tobacco bonds.”

Many States reached a Memorandum of Understanding (MoU) before the ruling and thus were not part of the arbitration panel’s focus. This group included 10 States that had issued “tobacco bonds” – including South Carolina, which later paid off its “tobacco bonds” – and 12 that had never securitized their MSA payments. New Jersey and Wyoming, two “non-contested” States, were among the signators.

Of course, the four States that are not party to the MSA – Florida, Minnesota, Mississippi and Texas – were not involved in this MSA dispute.

What’s next: The arbitration panel’s ruling resolved the dispute over the 2003 NPM payments and, we believe, may lead the participating manufacturers to reconsider their approach vis-à-vis other MSA disputed payments. The ruling also provides the States with considerable information about what constitutes diligent enforcement. As such, we would expect the ruling to help the States understand what they should do to reduce the likelihood that the participating manufacturers will initiate payment disputes related to future years’ payments.

Whether this arbitration panel’s ruling will lead to speedier or similar resolutions of the disputes related to other years’ MSA payments is still unknown. What is known is that receiving full and timely MSA payments remains in the interest of the States and in the interest of “tobacco bond” investors, many of whom have grown to appreciate how these high-yielding bonds have historically contributed to the total returns of our funds.

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Positive news from Puerto Rico: Increasing revenues

October 15, 2013

On September 30, Puerto Rico completed the first quarter of its fiscal year 2014 and on October 14, the Treasury of Puerto Rico announced the island’s first-quarter revenues. The results, as we expected, were quite positive and, because the majority of the national media has yet to pick up this story, we are sharing the news here.

General Fund revenues on island totaled $1.7 billion for the three months ended September 30. This was 5.4% higher than the July-to-September quarter in fiscal 2013. Additionally, General Fund revenue collections surpassed projections by $10.4 million. September collections were particularly strong, topping last September’s by 21%. While one quarter doesn’t make a year, increased revenues are a credit positive for the island and bondholders in our view.

Sales tax collections have also had a strong first quarter of fiscal year 2014 despite a stagnant to slightly declining economy. These collections go directly to pay sales tax bonds, commonly referred to as COFINA bonds. September sales tax collections were 5.4% higher than the previous year despite a persistently high unemployment rate during that period. For the first quarter, sales tax collections increased 5.5% over first quarter of fiscal 2013.

As we have noted elsewhere, the current administration – led by Governor Alejandro García Padilla – is working very hard to improve the finances of the Commonwealth. While these numbers reflect a very short time period, they do show a positive trend. The island has increased corporate taxes and worked to improve their sales tax collections, which historically have been sub-standard. The increased revenues support our belief that Puerto Rico is moving in the correct direction even though many other market participants disagree with our viewpoint.

You can read the press release here: http://www.gdbpr.com/documents/2013-10-13-CMU-RecaudosSeptiembre-Engtrsfinal.pdf.

There are many different opinions on Puerto Rico debt currently in the marketplace and we recommend investors consider all the opinions and facts before making any investment decision. While the above facts cannot be disputed, some material in this blog is opinion. While we are confident in our research, investors should understand the applicable risks, including the potential decline of both principal value and income generation, in the event of a default by any issuer, including Puerto Rico, which we continue to believe is unlikely.

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Our contrarian stance on Puerto Rico

October 7, 2013

Almost immediately after Detroit filed bankruptcy in mid-July, a variety of financial reporters and pundits turned their attention to Puerto Rico. They held a magnifying glass to the subject of Puerto Rico debt – many, we suspect, for the first time – and managed to light a spark that has been burning ever since.

What these reporters noticed was that the economy of Puerto Rico – like the economies of so many other geographies – is still struggling to recover, having been hit hard by the Great Recession. What most failed to emphasize was the significant progress that has been made in recent years by the administrations of Luis Fortuño and Alejandro García Padilla, the former and current governors.

The story of Puerto Rico’s renewed focus on fiscal discipline isn’t a new one, despite the hyperbole many are now using to tell it. Our team has researched and invested in the island's muni bonds for decades and believe that the fiscal conditions on the island are better now than they have been in the past 6 years.

That’s not a storyline that has gotten a lot of traction in the mainstream media of late, so we thought it was time to light a spark of our own and share the details that others seem content to omit. InvestmentNews, a weekly newspaper for financial advisors, recently published an article by Dan Loughran, a senior portfolio manager and senior vice president at OppenheimerFunds Inc. and the Rochester muni team’s leader.

The article lays out the facts about the government’s balance-strengthening initiatives and sheds more light on the attractive qualities that earlier reports underplayed or overlooked in their entirety – the constitutional requirement that Puerto Rico make its debt-service payments before using its revenues to pay anyone else; the fact that the Commonwealth has never defaulted on the payment of principal or interest on any of its debt, and the triple-tax exemption on the income generated by Puerto Rico muni bonds.

It’s a good read, if we say so ourselves, and should help investors maintain a more balanced perspective about Puerto Rico.

There are many different opinions on Puerto Rico debt currently in the marketplace and we recommend investors consider all the opinions and facts before making any investment decision. While the above facts cannot be disputed, some material in this blog is opinion. While we are confident in our research, investors should understand the applicable risks, including the potential decline of both principal value and income generation, in the event of a default by any issuer, including Puerto Rico, which we continue to believe is unlikely.

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Detroit misses G.O. bond payment

October 2, 2013

As has been widely anticipated, the City of Detroit failed to make scheduled interest payments on general obligation (G.O.) bonds deemed unsecured by the city's emergency manager on Tuesday. As a result, these bonds are currently in default status.

This development will most likely lead to rating agency downgrades of the city’s unlimited tax general obligation debt (ULTGO) and its limited tax obligation (LTGO) debt. The rating on Detroit’s Pension Obligation Certificates was downgraded to D by Fitch Ratings after those obligations missed $39.7 million of debt service payments in June.

This latest default was the result of a decision by Detroit’s Emergency Manager Kevyn Orr to treat ULTGO and LTGO debt, along with the city’s post-employment benefit obligations to retirees, as a single class of unsecured debt in bankruptcy. Rating agencies – and some market participants – fear that this treatment of municipal debt could undermine basic expectations of creditors during a debt workout.

The five Oppenheimer Rochester national municipal bond funds and Oppenheimer Rochester Michigan Municipal Fund all own Detroit G.O.s, and 100% of these bonds are insured by a variety of municipal bond insurers, including AGMC and FGIC. We fully expect that all insurers will fulfill their policy obligations to bondholders.

The Rochester funds also own Detroit Water and Sewer bonds. The city has more than $5 billion in these types of bonds outstanding, and Mr. Orr has already established a plan by which these bonds will be paid. Additionally, most of the Water and Sewer bonds owned by the funds are insured and not expected to experience any interruption in debt service payments.

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Analyzing Puerto Rico, risks and rewards

September 17, 2013

In light of the recent media coverage about Puerto Rico municipal bonds and their market performance, we believe it’s important to remind investors of our long-standing approach to fund management and to share our current perspectives about Puerto Rico’s municipal securities.

As part of our securities research and portfolio construction processes, we take a very active approach to managing the various risks that are associated with municipal bond investing. The Rochester team, for example, focuses on credit risk in balance with a security’s financial rewards when considering a specific issue for a specific portfolio. Portfolios are assembled utilizing a broad range of issues, a practice that can also help mitigate the potential impact of individual credit risk. Because the team feels that interest rates cannot be predicted accurately and consistently over time, it has designed a product line characterized by varied degrees of interest rate sensitivity for the investors’ discretion.

Those of you familiar with our approach know:

  • Our in-house credit research team uses sophisticated techniques to evaluate municipal credits
  • Our portfolio managers employ disciplined, yield-oriented investing strategies as we build portfolios that invest in many different industry sectors and accumulate bonds with varying maturities, coupons and quality levels
  • Our strategies remain focused on balancing many different types of risk to lessen those risks and earn relatively high levels of tax-free income
  • As we focus on making carefully researched, yield-enhancing investments, we continually monitor, reassess and, as necessary, cull securities from fund portfolios.

The risk control activities of the Rochester investment team are complemented by our partners in Risk Management. These professionals help the Rochester portfolio managers and credit analysts analyze aggregate credit, interest rate, liquidity, issuer and other risks that are a byproduct of our fundamental security selection process. Every holding within our portfolios passes through this entire set of robust credit screening, portfolio construction and risk management processes. A video featuring Chief Risk Officer Geoff Craddock and a detailed report on this approach can be found elsewhere on our website.

With this background as context, let us turn to what has been happening with our Puerto Rico bond exposures. Securities issued in Puerto Rico, like all other securities considered for our portfolios, are scrutinized with the processes described above before investment decisions are made and continually monitored thereafter. While all municipal bond investments are subject to price volatility and the possibility of default, it is our firm belief that that the Puerto Rico securities we hold provide high value to shareholders relative to the risk they incur.

A risk that is more difficult to control is “headline risk,” or the risk that some publication, pundit or other public forum will say something that creates a negative perception of one or more of our holdings. This happened recently when Barron’s published an article on the Commonwealth’s fiscal health. We were contacted by the reporter and Troy Willis, one of our senior portfolio managers, shared our perspectives about Puerto Rico, but his comments were overshadowed by errant “facts.”

Other media organizations have followed Barron’s lead, and some even focused on one-month returns. We believe the use of such a short investment timeframe should provide savvy muni investors with solid evidence as to the credibility – or more accurately the lack thereof – of these reports.

Our perspective, as Troy explained, is that “Puerto Rico is moving in the right direction” and that the risk/reward in the island’s debt over the long term is “pretty compelling” at current levels.

Our rationale remains as follows:

  • The income generated by the island’s muni bonds is exempt from all federal, state and local income tax
  • The current and previous governors of Puerto Rico have made significant strides in recent years to:
    • Strengthen the island’s balance sheet
    • Right-size the government
    • Enact comprehensive pension reforms
    • Raise revenues via tax rate changes and improved enforcement
    • Build on Puerto Rico’s unique qualities
  • Puerto Rico’s constitution requires that general obligation bonds and guaranteed debt be given first-priority status on all revenues of the island
  • The constitution also limits the borrowing authority of the central government and its three largest municipalities to 10% of assessed property valuations
  • Bonds issued by the “businesses” and agencies overseen by the Government Development Bank are backed by each agency’s own revenue stream
  • While still a developing economy, Puerto Rico has a well-developed infrastructure, a port that is attractive to foreign companies and a workforce that is highly skilled, bilingual and underutilized.

There are many different opinions on Puerto Rico debt currently in the marketplace and we recommend investors consider all the opinions and facts before making any investment decision. While the above facts cannot be disputed, some material in this blog is opinion. While we are confident in our research, investors should understand the applicable risks, including the potential decline of both principal value and income generation, in the event of a default by any issuer, including Puerto Rico, which we continue to believe is unlikely.

For long-term investors, the yields on Puerto Rico paper remain highly attractive – and not just because prices have been depressed of late by the broader developments that are affecting all credit markets. While past performance doesn’t guarantee future results, investors currently benefit from the attractive yields that carefully researched Puerto Rico municipal bonds are positioned to offer. Clearly, the risk/reward trade-offs of holding lower-rated securities may not appeal to all investors.

The Rochester team will continue to monitor market developments closely and will adjust our portfolio holdings as we believe appropriate in response to market conditions. Our long-standing practice is to make investment decisions based on each day's market. We do not decide to invest in a particular sector and then look at what's available in that sector. We look at the complete municipal market and identify the buying (and selling) opportunities that we believe will provide the greatest long-term benefit to our shareholders.

While market conditions can and do fluctuate, we do not waver in our belief in the power of tax-free yield to help investors achieve their long-term objectives.

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Detroit's news was a long time coming

July 19, 2013

While the news that Detroit, the 18th largest city in the United States, filed for bankruptcy Thursday afternoon is getting significant media attention, it does not – in any way – represent a surprising development.

The Rochester team has been monitoring the fiscal conditions in the Motor City for years, as these excerpts demonstrate:

  • On March 20, 2012, in an earlier Communiqué blog item titled “A few things muni investors probably shouldn’t worry about,” we included Detroit’s fiscal headaches: “Mayor Dave Bing wants the Motor City to retain autonomy and solve the problem on its own. Michigan's governor, Rick Snyder, has put forth a consent decree that calls for the establishment of a nine-person financial advisory board. State treasury officials are comparing this board to the team that "saved the City of New York from bankruptcy in the 1970s," but Mayor Bing sees it as a state takeover that "forfeits the electoral rights of the citizens of Detroit." If the stalemate continues, the governor still has the option to appoint an emergency manager to run the show. With all of these folks interested in resolving Detroit’s financial woes, it seems likely that one of these approaches will succeed.”
  • In our quarterly Market Perspective dated March 31, 2012, we noted that investors were “doing a good job of ignoring the headlines that probably won’t make a big difference in the overall market. For example, we’ve all seen countless news stories about the financial woes of Harrisburg, Pennsylvania; Jefferson County, Alabama; Stockton, California, and Detroit, but those municipalities represent a very, very narrow slice of the $3.7 trillion muni market. Elected and appointed officials are working hard to resolve the issues in these municipalities and, in some cases, are relying on bond insurance to keep current on their debt. Investors should expect more ‘news’ as the problems get worked out, but we expect the market to continue to take the developments in stride.”
  • In our shareholder reports for investors in Oppenheimer Rochester Michigan Municipal Bond Fund, we began focusing on Detroit in early 2012 as well. “Legislators approved Governor [Rick] Snyder’s plan to broaden the state’s power over fiscally stressed local governments, including Detroit, where financial solutions continued to be debated as this reporting period ended.”
  • And more recently, we mentioned Detroit when we blogged about the June 2013 market volatility, explaining that the “selloff has absolutely nothing to do with Detroit. That city has had well documented issues for nearly a decade.”

We have also written extensively about Chapter 9 municipal bankruptcy, as investors clamored for insights about Jefferson County, Alabama, and Vallejo and Stockton, California.

We believe there are several important points to keep top of mind: 1) it often takes years for a municipality to emerge from bankruptcy; 2) it is way too early for anyone to know with any degree of certainty how different creditors will be treated; and 3) any long-term implications of Detroit’s filing will depend on how the bankruptcy judge ultimately rules.

Six of our 20 funds include municipal securities issued in and around Detroit: our five national funds and, not surprisingly, our Michigan fund. Our latest shareholder reports can be found here. Please note: not all issues that include the word “Detroit” are affected by the city’s bankruptcy filing.

We will continue to monitor closely the developments in Detroit and, as usual, will work diligently to protect our shareholders’ interests. Our Twitter feed will remain a good source of information that we believe to be most relevant to our investors.

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What is Rochester currently seeing in the municipal market?

June 24, 2013

We’d like to share with you some of our thoughts and observations regarding the recent volatility in the municipal bond market.

  • This is not an Oppenheimer Rochester specific event. Almost every asset class has been volatile recently and municipal bonds and bond funds have been down. As you can see from the two charts below, rates (yields) have increased since May 1st.
  • We expect the technicals in the municipal market to improve. While demand for municipal bonds has fallen off significantly (municipal bond fund outflows of $2.2 billion for the week ending 6/19), we have begun to see supply slow down also. Just last week, California Health Facilities delayed an $800 million deal and the NY MTA tabled a $350 million issuance. Additionally, with the rise in rates, it no longer makes sense for many borrowers to refinance (call) existing debt, so we expect supply to further slow. Finally, July 1st is a big day in the municipal market for re-investment, with many bonds paying dividends or maturing, we expect this to create retail demand.
  • This is NOT a credit event. We are confident municipal credit is still strong and getting better. This selloff has absolutely nothing to do with Detroit. That city has had well documented issues for nearly a decade. In our five national funds and our Michigan specific fund, all of the Detroit G.O. bonds that we hold are insured and the insurance companies have said all bondholders will receive payments on time and in full. Additionally, in these funds, we hold Detroit Water and Sewer bonds. These bonds are secured by a dedicated revenue stream and we are scheduled to be paid in full and on time in the emergency manager’s proposal. Similar bond structures have withstood other municipal bankruptcies, for example in Vallejo.
  • The municipal market has remained liquid, with ample secondary market trading, during this increase in rates. We are able to trade bonds and have other tools available for additional liquidity.
  • As many of you know, we do not forecast interest rates in Rochester, nor do we reposition our funds in anticipation of or reaction to interest rate moves. Our long municipal bond funds will remain long, while our short funds will remain short. It is our belief that yield drives total return over time and we will continue to strive to find attractive amounts of tax-advantaged yield for our shareholders. Yield that looks even more attractive after factoring in increasing taxes!

Recent Movement in Rates

5 year10 year20 year
Change in rates0.770.860.82

G.O. A-rated munis

5 year10 year20 year
Change in rates0.400.560.50

Sources: www.treasury.gov; Bloomberg

We understand that volatile markets can be trying for even the most seasoned investors and shareholders. Remember that municipal bonds are designed to provide an income stream that is exempt from federal taxes. Staying focused on the category leading distribution yields that most of our funds have historically provided helps us stay focused on the big picture and we believe most investors would benefit from doing the same.

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Stockton, California, ruled eligible for bankruptcy protection

April 18, 2013

On April 1, 2013, U.S. Bankruptcy Court Judge Christopher Klein ruled that the city of Stockton, California had met all federal code requirements to enter Chapter 9 bankruptcy. The ruling rejected creditors’ arguments that Stockton had not negotiated in good faith to avoid bankruptcy, and that it was not insolvent when it filed its bankruptcy petition.

Creditors included municipal bond insurance companies and institutional bond firms. The creditors argued that, while Stockton had proposed bond firms take a haircut to principal, and bond insurers make up shortages, no such negotiation had taken place with the city’s largest creditor: the California Public Employees Retirement System, known as CalPERS. The city argued that it was obligated to make payments to CalPERS under California state law, and that it had no legal authority to negotiate $900 million owed to the system to cover pension promises.

The potential conflict of federal bankruptcy law and state law governing Stockton’s pension obligation to CalPERS could make this Chapter 9 filing precedent-setting. Without the contract-impairing power of federal bankruptcy law, the city would have little choice but to follow California state law. The next phase of the proceeding will be for the city to submit a plan to reorganize its debt, subject to Judge Klein’s review and approval. This process will likely take place over the next several months.

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Does this S&P downgrade make sense to you?

April 4, 2013

Last week, Standard & Poor’s downgraded the Puerto Rico Aqueduct and Sewer Authority (PRASA). The PRASA bonds that are guaranteed by the Commonwealth of Puerto Rico were downgraded one notch, to BBB-minus. The PRASA bonds that are secured by a gross revenue pledge from the authority were downgraded to BB-plus, from BBB-minus. Fitch Ratings maintains an investment-grade rating (BBB-minus) for the bonds with a gross revenue pledge.

We find the downgrade questionable and see it as yet another instance where rating agencies focus on historical numbers, as compared with what the future will look like given the significant changes that are being made. Considering there are likely many questions concerning Puerto Rico and PRASA, we thought we’d provide S&P’s reasons for the downgrade, our response to those reasons and then let you decide.

S&P credit analyst Theodore Chapman listed the following items in a recent article in The Bond Buyer:

The Bond Buyer: “Chapman pointed to three factors to explain the low rating of the authority.

“First, PRASA has a relatively fragmented water and wastewater system. As a result of that, and a history of inadequate capital investment, the authority cannot account for 64% of the drinkable water produced, which Chapman considers a very high level.”

The Rochester team: This is not new news. S&P is correct that PRASA has had a history of inadequate capital investment. While the authority cannot account for 64% of the drinkable water produced, the 36% that the authority can account for has been sufficient for PRASA to make all principal and interest payments on its municipal debt. PRASA has begun to address the concerns its inability to account for all of the drinkable water it produces, which we believe should only help enhance the credit and PRASA’s bottom line.

The Bond Buyer: “Second, the authority declined to raise rates for nearly 20 years and has historically had poor billing and collection systems.”

The Rochester team: It was true that PRASA did not increase rates for nearly 20 years … until this February! PRASA’s board of directors voted to approve a 67% rate increase effective July 1, 2013. So even though rates haven’t increased for 20 years, PRASA has never missed a principal or interest payment and, effective July 1, 2013, it is expected to see increased revenue. PRASA is, to quote S&P, “the sole provider of water and wastewater sewer service on the island,” so if you want water and sewer in Puerto Rico, the only legal and ethical choice is to pay the increased rate. What if the government doesn’t like the increase? Well, PRASA doesn’t need legislative approval to increase rates. Finally, PRASA expects positive operating performance starting in FY14, projecting net operating income of $73 million after all expenses, including debt service, have been paid.

The Bond Buyer: “Third, PRASA has identified $1.5 billion in needed capital improvements, though as much as $1.2 billion of it may be externally funded. The agency is the sole provider of water and wastewater sewer service on the island.”

The Rochester team: The first sentence seems to read a lot like S&P’s first reason. Yes, they need capital improvements, as do many water and sewer systems in the United States. Yes, it is a large amount, but if most of that will be externally funded, PRASA will likely be on the hook for very little of that money. Plus, PRASA’s projected revenue increase should allow it to meet its capital improvement costs. The second sentence above, in our opinion, is where S&P’s logic really goes off the rails. We view having a monopoly on the island’s water and sewer system as a strong credit positive. It’s not like some start-up can come in and create a new sewer system.

The Bond Buyer: “As for positive factors affecting the authority’s debt, the Government Development Bank of Puerto Rico [GDB] has provided liquidity support through lines of credit, Chapman wrote.”

The Rochester team: The GDB, which is the financing arm of the Puerto Rican government, has a long history of supporting the island’s essential services, including PRASA. Governor Garcia Padilla has worked hard to take fiscally responsible measures since taking office in January. We see no reason why the GDB wouldn’t continue its history of supporting PRASA if fiscal strains develop in the future.

So, there are the two sides to the story. We will let you decide on the creditworthiness of PRASA for yourself.

We made our credit decision long before S&P changed its ratings, based on our determination through internal credit research that the default risk of bonds issued in Puerto Rico is low. While past performance is no guarantee of future results, we continue to see value in many Puerto Rican municipal bonds and believe we have been getting paid very well compared to other munis in today’s marketplace. Puerto Rico paper has been – and, given current valuations, will likely continue to be – a large segment of the holdings of many of our funds. You can find a complete listing of holdings in each fund’s annual and semiannual reports.

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Oppenheimer Rochester announces name changes on two funds

March 28, 2013

Please be aware of the following name changes to the Oppenheimer Rochester municipal bond fund lineup:

  • Limited Term New York Municipal Fund has changed to Oppenheimer Rochester Limited Term New York Municipal Fund
  • Rochester Fund Municipals has changed to Oppenheimer Rochester Fund Municipals

This change is effective as of March 28, 2013, and will be noted in the new prospectus as of the same date.

We changed the name of these funds to better align the full Oppenheimer Rochester suite of municipal bond funds.

Please note that the old name may continue to appear on marketing material in the near future, while we update all of our literature.

We thank you for your patience and, as always, invite you to bring any questions to our attention.

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Tobacco bond update: Decline in consumption hit a 6-year low in 2012

March 4, 2013

MSA-eligible cigarette shipments fell a mere 2.02% in 2012, according to the December 2012 Statistical Report recently published by the U.S. Treasury Department’s Alcohol and Tobacco Tax and Trade Bureau (TTB) which is a good barometer for the Master Settlement Agreement (MSA). This is the lowest consumption decline number in the past 6 years and is ~50 bps lower than the municipal market expected in September. Two contributing factors to this favorable decline number were: benign state excise tax activity and price competition among the four original participating manufacturers.

While our applauding a declining consumption number might seem strange, we remind readers that a consumption decline of less than 3% is a credit positive for bondholders. The MSA factored in declining consumption of approximately 3% when it was drafted in 1998 due to the fact consumption had been decreasing since the early 1980s. To offset this, the dollars paid into the MSA per cigarette shipped within the United States increases each year by 3% or core CPI, whichever is greater. In 2012, core CPI was slightly below 3%, so the increase in this year’s payment will be the floor of 3%.

With this positive development, we expect the total MSA payment made to the 46 participating states to be north of $6 billion again this year. MSA-backed municipal tobacco bonds continue to be one of our favorite sectors and to be overweight in many of our funds. Sector percentage information can be found on the Holdings & Statistics tab of our fund pages.

In 2012, the tobacco bond sector had a positive impact on our funds’ total returns and was one of the top sectors in the entire municipal market. We consistently remind shareholders that no tobacco bond has ever missed a scheduled principal or interest payment. We believe these bonds are positioned to continue to pay us attractive amounts of tax-advantaged income into the future.

Our 2012 Annual Overview contains a section on tobacco bonds if you would like additional comments on the sector.

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A sweetheart deal in the making? A look at the AMR-US Airways merger plan

February 19, 2013

Will the merger agreement between American Airlines and US Airways that was announced on February 14 be seen as a sweetheart deal? At this point, it’s too soon to tell and, as a creditor of AMR, the parent company of American, we’re limited from saying much more than you can read in the papers.

We can, however, direct you to a few salient points. First of all, the deal has to be approved by the bankruptcy court judge who has overseen American’s restructuring plans since November 2011, when the carrier filed for bankruptcy protection. Labor unions must weigh in and, according to Reuters, not all of them support the deal: while pilots, flight attendants and ground service workers are said to support the deal, machinists currently claim that they won’t do so until their renewed contracts have been completed.

Secured and unsecured creditors, including our funds, also have a say in whether the merger can proceed. Existing creditors may receive an equity stake in the consolidated company.

In our Annual Overview 2012, we wrote that “it appeared as if very favorable outcomes were on the horizon for our secured American holdings.” We had already been paid in full for bonds financing the airline’s maintenance facilities in Tulsa. We also reported that the trustees for our secured bonds financing Los Angeles International and John F. Kennedy International terminals had received full payments for the LAX bonds and the JFK bonds; payments to bondholders will need the bankruptcy court’s approval before they can be released.

The exact timing for all these approvals has yet to be worked out. However, we believe this merger agreement supports an idea that we have often conveyed to our shareholders: our credit team’s experience with issuers that have filed for bankruptcy can often lead to largely positive outcomes. You gotta love them for that.


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Oppenheimer Rochester announces name changes on two funds

January 30, 2013

Please be aware of the following name changes to the Oppenheimer Rochester municipal bond fund lineup:

  • Oppenheimer Limited Term Municipal Fund has changed to Oppenheimer Rochester Limited Term Municipal Fund
  • Oppenheimer AMT-Free New York Municipals has changed to Oppenheimer Rochester AMT-Free New York Municipal Fund

These changes are effective as of January 28, 2013, and will be noted in the new prospectus as of the same date.

We changed the names of these funds to better align the full Oppenheimer Rochester suite of municipal bond funds.

Please note that the old names may continue to appear on marketing material in the near future, while we update all of our literature.

We thank you for your patience and, as always, invite you to bring any questions to our attention.

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All bond ratings referenced are supplied by a Nationally Recognized Statistical Rating Organization (which include such credit ratings agencies as Standard & Poor’s, Moody’s Investors Service and Fitch Ratings) and imply a level of financial strength relative to other similarly rated investments.  Methodologies vary among these  agencies, and the ratings used represent the agencies’ opinions as to the credit quality of issues that each agency rates.  These ratings are neither endorsed by nor verified by OppenheimerFunds, Inc. Further information about each agency’s approach is summarized in the appendix to our funds’ Statements of Additional Information.

Fixed-income investing entails credit and interest rate risks (when interest rates rise, bond/fund prices generally fall). 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; however, income distributions from Rochester’s two AMT-free funds will not increase an investor’s exposure to AMT. Capital gains distributions are taxable as capital gains. 

Oppenheimer Rochester® municipal bond funds include below-investment-grade securities (“junk bonds”) that may be more at risk of default and subject to liquidity risk. Funds can maintain 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, that are prone to above-average price volatility. Funds may invest substantially in U.S. territories, commonwealths and possessions and could be exposed to their local economic and political conditions. State-specific muni bond funds may also invest in a limited number of issues within a single state, which can further increase volatility and exposure to regional developments. Fund holdings are subject to change.

Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including the possible loss of the principal amount invested.

Before investing in any of the Oppenheimer funds, investors should carefully consider a fund's investment objectives, risks, charges and expenses. Fund prospectuses and summary prospectuses contain this and other information about the funds, and may be obtained by asking your financial advisor, visiting oppenheimerfunds.com, or calling 1.800.CALL OPP (225.5677). Read prospectuses and summary prospectuses carefully before investing.

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