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OppenheimerFunds Piles Up Defaulted Dirt Bonds: Chart of Day

Date: Oct 1 2009 6:00:00
By Jerry Hart               

Oct. 1 (Bloomberg) -- OppenheimerFunds Inc. and Van Kampen Investments Inc. are stockpiling defaulted Florida bonds sold to finance the roads and utilities of new real estate developments. Some are buying the securities at 70 percent below face value.

The CHART OF THE DAY shows the five largest owners of defaulted Florida Community Development District debt. Their holdings rose 11 percent from the end of the first quarter to Aug. 31, according to the Distressed Debt Securities newsletter and data compiled by Bloomberg. Van Kampen Municipal Trust's holdings increased the most -- 38 percent, or $58 million -- to $211.5 million. OppenheimerFunds' stake, which gained 12 percent or $11.6 million, is the largest at $952.5 million.

Florida's 600 development districts sold about $6.5 billion of the so-called dirt bonds since 2003, with half now in default, the newsletter reported. The tax-exempt securities are repaid with assessments on homeowners. Until homes are sold, developers are required to meet interest payments, and if they can't, the debt may default.

Defaults and purchases for as low as 27 cents on the dollar are increasing dirt-bond investments at mutual funds, said Richard Lehmann, publisher of Miami Lakes, Florida-based Distressed Debt. Firms might profit if they buy failed developments at distressed prices and work with builders to revive projects, rescuing the bonds, he said.

"If you control the land, you have to make the assessment payments," he explained, "and if you own the bonds, you're paying yourself. If you bail the project out, you make a profit on the land and the bonds."

OppenheimerFunds doesn't own real estate, said Scott Cottier, a portfolio manager at its Rochester municipal bond funds in Rochester, New York. "I manage long-term for yield and I can hold these securities until we find the most optimum outcome," he said. "Ultimately, this land will be built on."