U.S. mutual funds that held onto Puerto Rican debt as its economy crept toward collapse could get drawn into battles that pit their own investors against each other, Reuters reported today. The reason for the quandary lies in the territory's Byzantine capital structure, where 18 public agencies owe a combined $120 billion in bond and pension debt. Bonds held by the companies' many funds are spread across myriad credits, some in direct competition for recoveries, meaning wins for some investors trigger losses for others. For OppenheimerFunds and Franklin Advisers, negotiating that minefield is particularly important. The funds say that their cross-holdings reflect a long-term commitment to Puerto Rico, and give them more of a stake than other creditors. Bankruptcy and municipal bond experts say, however, that the competing claims raise questions about whether they can represent investors' best interests. It adds a wrinkle to already complex restructuring talks, muddying the path to recovery for investors who tied up their savings in Puerto Rico. "This is not something I've seen in the bankruptcy world," said Prof. Drew Dawson of the University of Miami School of Law and ABI’s Spring 2017 Resident Scholar. While it is not rare for a creditor to hold multiple tranches of debt, it is less common when the creditor runs many funds with competing investments, he added. "You run all these funds — which do you side with?" Prof. Dawson said. "If I were an investor, I'd be concerned."
