June 30 U.S. mutual funds holding about $1.7
billion in Puerto Rico debt have sued the cash-strapped
commonwealth, accusing the Caribbean island of passing an act
modeled after the U.S. bankruptcy code in what could be a
potential threat to American investors.
Passage of the act has spooked the $3.7 trillion U.S.
municipal bond market, sending down prices of revenue bonds
issued by Puerto Rico's electric authority. U.S. municipal bonds
funds are the largest holders of the island's debt because it is
tax-exempt in every state.
Puerto Rico is one of the largest issuers of debt in the
U.S. municipal bond market. Under its constitution, Puerto Rico
doesn't have the power to enact a bankruptcy law for the
adjustment of its debts. The complaint contends Puerto Rico
passed an act modeled after title 11 of the U.S. Bankruptcy
code, which is used by U.S. corporations to reorganize.
Bond funds run by OppenheimerFunds, a unit of insurer
MassMutual Financial Group, and Franklin Templeton, filed an
amended complaint against the commonwealth on Sunday in U.S.
District Court in Puerto Rico. The two fund groups are among the
largest investors in the beat-up electric revenue bonds.
The funds are asking a federal judge to declare that Puerto
Rico's recently passed Public Corporation Debt Enforcement and
Recovery Act violates the U.S. Constitution.
"The Act purports to offer to certain public corporations
within the Commonwealth the ability, among other things, to
invoke protections from creditors and modify debts," the funds
said in the amended complaint. "The Act is expressly modeled on
title 11 of the United States Code."
Franklin Funds, a unit of Franklin Resources Inc,
holds about $907.2 million in revenue bonds issued by the Puerto
Rico Power Authority (PREPA). Oppenheimer's Rochester funds hold
about $821.4 million in the PREPA bonds, according to the
Last week, Fitch Ratings downgraded the PREPA to "CC" from
"BB" after the act was passed. Since passage, long-dated PREPA
bonds, or those maturing in 20 years or beyond, have dropped by
about 15 percent, according to the complaint. Short-dated bonds,
or those maturing over the next four years, have fallen as much
as 40 percent, the complaint said.
(Reporting by Tim McLaughlin; Editing by James Dalgleish)