Munis Remain Popular

Tobacco bonds. During this quarter, tobacco bond prices continued to outperform those of other types of municipal bonds. To date, 2016 marks the third year of outperformance for these bonds. In May, Fitch Ratings announced that it would discontinue rating bonds backed by payments from the 1998 Master Settlement Agreement (the “MSA”) citing difficulty in predicting annual MSA payments going forward. This development had little effect on the tobacco bond market, as investors continued to seek attractive yield offered by these securities. We agree that rigorous research is absolutely necessary when investing in tobacco bonds; but careful bond selection can result in attractive investment opportunities.

U.S. Supreme Court Ruling. On June 14th, the United States Supreme Court held that Federal law preempts Puerto Rico from enacting its own bankruptcy law by invalidating the Puerto Rico Public Debt Enforcement and Recovery Act (the “Recovery Act”) which the Commonwealth had enacted in 2014. In their opinion, the Justices upheld the rulings of two lower courts, stating that the Recovery Act, which would have enabled Puerto Rico to unilaterally restructure the debt of its public utilities under the supervision of a Commonwealth court, was invalid.

We see this decision as being positive for owners of bonds issued by Puerto Rico public utilities, and argued diligently in favor of this conclusion. We believe that shareholders in our Funds which own these bonds benefit from the Court’s decision against the Recovery Act’s unilateral restructuring provisions. At the end of the quarter, the United States Senate passed the Puerto Rico Oversight, Management, and Economic Stability Act, commonly referred to as PROMESA. This Act was intended to help stabilize finances in Puerto Rico in three ways: initiating debt-restructuring provisions, establishing an Oversight Board with authority over debt-restructuring processes and launching fiscal reform aimed at helping to promote economic expansion in Puerto Rico. The bill passed with bipartisan support, 68-30, and became law on June 30th.

We see PROMESA as being generally positive for owners of Puerto Rico municipal bonds, and the Oppenheimer Rochester municipal bond funds that have Puerto Rico bonds in their portfolios. The control board established under this Act will be charged with obtaining audited financial statements, approving Puerto Rico’s budget and ensuring good faith negotiations between the island and bondholders. Historically, control boards have achieved positive results. Control boards that were established for New York City and Washington D.C. are two examples of the potentially positive outcome for this structure.

While year-to-date total returns at net asset value (NAV) were positive for the Class A shares of all 20 Oppenheimer municipal bond funds, we think investors should pay particular attention to the funds’ longer-term results. We are pleased to report that Oppenheimer Rochester funds have delivered positive average annual total returns at MOP (maximum offering price, after sales charge) for the Class A shares of the 20 muni bond funds with 5-year results, the 10 funds with 10-year results, the 9 funds with 15- and 20-year results and the 6 funds with 25-year results. Current prices and the average annual total returns as of June 30, 2016, are available.

Portfolio Management

At the end of June, long-time Rochester Portfolio Manager Dan Loughran announced his retirement. He will remain with OppenheimerFunds in an advisory capacity through the end of September, 2016. We greatly appreciate all of the guidance and leadership that he has provided over twenty years with the Oppenheimer Rochester municipal bond funds, and will miss him personally. Senior Portfolio Managers Scott Cottier and Troy Willis have assumed management of day-to-day operations in Rochester, and will oversee our portfolio management and credit research teams going forward. Dan Loughran leaves us with ongoing commitment to the traditional “Rochester style” of municipal bond fund management, and to our quest for long-term, yield-driven total return for our shareholders.

Each and every member of the Rochester team is committed to creating shareholder value. We will continue to post updates online and to make use of our Twitter feed. And, as we have done throughout the past three decades, we will pursue outcomes that we believe are in the best interests of our shareholders.

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