UPDATE 3-Puerto Rico agency debt slumps as law fuels default fears

Fri Jun 27, 2014 5:13pm EDT

(Adds details of agency debt, PRASA statement)

By Edward Krudy

June 27 (Reuters) - Debt in some of Puerto Rico's biggest public corporations slumped in heavy trade on Friday after a new law allowing them to restructure their debt sparked ratings downgrades and fears of imminent default.

The rapid turn of events that started with the announcement of the law on Wednesday led to a sustained bout of selling in the debt of the U.S. Commonwealth's electricity, highway and water authorities.

By Friday some issues traded as low as 35 cents on the dollar with yields of over 25 percent as investors demanded a steep premium for the perceived risk of the debt.

The new law appeared to take investors by surprise with a rumor circulating in the market that PREPA, the electricity authority, could miss a debt payment as early as next week when a coupon comes due on Tuesday 1, according to one fund manager.

"This is a new landscape unfolding in Puerto Rico relatively quickly," said Robert Amodeo, a portfolio manager at Western Asset, adding that the situation was changing "much faster than you would have imagined just last week."

The selling was concentrated in the debt of the Puerto Rico Aqueduct & Sewer Authority (PRASA), the Puerto Rico Electric Power Authority (PREPA) and the Puerto Rico Highway & Transportation Authority (PRHTA). The debt of all three authorities has been downgraded by ratings agencies this week.

PREPA has about $8.8 billion of outstanding debt, according to a Commonwealth report issued last October. PRHTA has debt of $7.1 billion and PRASA has $4.6 billion.

The law, passed by the legislature on Wednesday, lays out a bankruptcy-like process for some public corporations. It is seen widely as a first step to allow the most troubled public corporations in the U.S. Commonwealth to restructure their debt.

The president of PRASA, Alberto Lazaro, in a statement on Friday said he does not foresee restructuring the agency's debt.

Debt of PREPA maturing in 2040 and carrying a coupon of 5.25 percent on Friday traded with an average price of 45.956 cents on the dollar and an average yield of 12.139 percent, according to Thomson Reuters data.

Highway authority debt maturing in 2023 and carrying a coupon of 5.5 percent traded with an average price of 35.50 cents on the dollar and a yield of 22.522 percent. More than $8 million of the bonds traded, volume not seen since the issue came to market in 2007.

All three major ratings agencies have downgraded PREPA's debt since Wednesday. S&P on Friday downgraded its rating on PREPA for the second time this month. Moody's cut its rating on the sewer and highway authorities on Friday.

"If PREPA is not able to renew the lines of credit or secure other liquidity, it may choose to restructure its debt, as allowed by the new law, which could increase bondholders' risk of not receiving full and timely payment," Standard & Poor's credit analyst Judith Waite wrote. (bit.ly/1qOHIAD) (Reporting by Edward Krudy in New York; Additional reporting by Kanika Sikka in Bangalore; Editing by Leslie Adler)