UPDATE 2-Puerto Rico seeks to reassure markets on $70 bln debt

Thu Jul 10, 2014 2:51pm EDT

(Adds Pedro Pierluisi comment, details of ratings action)

By Edward Krudy

July 10 (Reuters) - Puerto Rico's willingness and ability to honor its debts "should be unquestioned," high-ranking commonwealth officials said on Thursday, the latest attempt to convince markets that the island is not about to default on $70 billion of debt.

Investors have reacted badly to a new law that allows the U.S. commonwealth's public corporations, such as the electric power authority (PREPA), to restructure debt, potentially forcing large losses on bond holders. Ratings agencies have slashed the island's debt ratings, sparking a market sell-off.

Commonwealth officials, who were hoping to isolate public corporation debt of around $20 billion, have struggled to convince investors that the island's general obligation and tax revenue, or COFINA, bonds are sound. Thursday's statement sought to reinforce that point.

"Puerto Rico has repeatedly delivered on its credit promises, and the willingness and ability of the Commonwealth to honor its obligations should be unquestioned in light of its actions over the last 18 months," David Chafey, chairman of the Government Development Bank, and Treasury Secretary Melba Acosta Febo said in the joint statement.

The statement comes a day after Standard & Poor's slashed its rating on PREPA's debt four notches to 'B-', a highly speculative rating. At the same time, Fitch cut its ratings on a range of Puerto Rico debt, including GO and COFINA bonds.

Puerto Rico's debt has stabilized after the recent sell-off. Benchmark general obligation bonds with a maturity of 2035 and a coupon of 8 percent rose to trade at an average price of 84.564 cents, with a yield of 9.74 percent.

If island officials are unable to persuade markets that restructuring will only affect corporations, it may lose market access and have trouble refinancing debt in 2015.

Chafey and Febo said they stand behind the "Recovery Act." The law has been challenged by Puerto Rico bondholders, OppenheimerFunds and Franklin Templeton, in court.

The law has been criticized by Pedro Pierluisi, Puerto Rico's non-voting member of the U.S. House of Representatives.

"Instead of working in coordination with my office to determine if Chapter 9 can be amended to give Puerto Rico the same authority that states have for their instrumentalities, the governor had his delegation in the Legislative Assembly pass an 150-page bill in less than a day," said Pierluisi.

Credit default swaps of two bond insurers that insure around $10 billion of Puerto Rico's debt, MBIA Inc and Assured Guaranty, rose on Thursday.

The cost to insure MBIA debt for five years rose 9.5 percent in two weeks. On Thursday, the price was quoted at 783 basis points, up from 715.5 basis points on June 23, according to Markit. With an upfront payment of 25 percent, it would cost roughly $32,000 to insure $100,000 of MBIA debt for the first year.

MBIA's stock fell 1.8 percent to $9.40 on Thursday, trading at the lowest level in over a year. Assured's share price fell 1 percent to $22.78, around its lowest in five months. (Reporting by Edward Krudy and Dan Burns; Editing by James Dalgleish and Dan Grebler)