Puerto Rico

January 30, 2019

Sheila Amoroso is director of the Municipal Bond Department, Franklin Templeton Fixed Income Group®.

In our continuing efforts to keep our shareholders informed about events in Puerto Rico, we are providing this update.

For over 30 years, Franklin Advisers has been an investor in Puerto Rico bonds, which have historically been part of the investment opportunity set for municipal bond funds because of the bonds’ triple tax-free status (interest exempt from federal, state and local income taxes). Through the years, these bonds have been used to fund infrastructure projects across the island, including schools, public and private universities, hospitals, public housing, public buildings, airport facilities, transportation, electric utilities, water and sewer systems, as well as various economic development projects.

In 2012, we began reducing exposure to Puerto Rico-related bonds due to the weakening financial conditions on the island. We retained those investments that we believed were in the strongest position and felt had significant legal and constitutional protections by their indentures, applicable law and the Puerto Rico constitution.

In the years since, we have continued to selectively reduce our holdings and, as has been disclosed in certain legal filings, Franklin Advisers has sold all of its General Obligation, Cofina and Public Building Authority bonds. We continue to be a member of the PREPA Ad Hoc Bondholder Group.

Puerto Rico debt now comprises less than 1% of our Franklin Tax-Free Income group's assets under management of over $62 billion as of December 31, 2018.

Detailed holding information for Franklin Templeton funds

Puerto Rico Electric Power Authority (“PREPA”) Preliminary Restructuring Agreement

On Monday, July 30, 2018, the PREPA Ad Hoc Bondholder Group, the Financial Oversight and Management Board of Puerto Rico (the Oversight Board), the Puerto Rico Fiscal Agency & Financial Advisory Authority and PREPA announced agreement on a debt restructuring Term Sheet Agreement (TSA). Pursuant to the terms of the TSA, bondholders would exchange PREPA revenue bonds into new securitization debt. The new debt would be secured by a separate transition charge on ratepayer bills.

In conjunction with the TSA, the parties have entered into a preliminary Restructuring Support Agreement (RSA). This preliminary RSA is subject to revision as the parties work to finalize its terms over the coming months. Once a final RSA is agreed upon, the process to exchange the bonds would begin. While it is likely to take some time to get to an actual exchange of the bonds, the preliminary RSA marks a significant milestone towards commencing that process.

We have always taken a constructive approach to creating a path that will allow for the continued transformation and long-term sustainability of PREPA. We believe that this agreement will help create a positive economic impact for Puerto Rico and its people in addition to PREPA. We continue to work collaboratively towards implementation of a final plan.