(Adds details of agency debt, PRASA statement)
By Edward Krudy
June 27 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
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)