(Adds PREPA bond payment due Tuesday, analysts' comments,
recent economic activity)
By Tim McLaughlin and Lisa Lambert
June 30 Puerto Rico's financial troubles
worsened on Monday after mutual funds holding about $1.7 billion
of its debt sued the commonwealth, while investors continued to
dump debt sold by the island's public corporations.
The flashpoint for the lawsuit brought by two large
institutional holders is a law passed last week allowing the
U.S. territory's public corporations - primarily its electric
power authority known as PREPA - to restructure their debt. The
law sparked a sharp selloff in these agencies' bonds that
extended on Monday.
Under its constitution, Puerto Rico, one of the largest
issuers of municipal bonds, does not have the power to enact a
bankruptcy law to adjust its debt, but island authorities say
the entities in question are not subject to that rule.
The mutual funds disagree and their reaction raised the
possibility of a protracted legal battle over Puerto Rico's
obligations to debtholders. Their complaint contends Puerto Rico
passed an act modeled after title 11 of the U.S. bankruptcy code
used by corporations to reorganize.
The newly enacted law specifically excludes the commonwealth
and the Government Development Bank. Still, it has stoked
concerns about the potential restructuring of commonwealth debt.
On Monday, Puerto Rico's financial leadership said the law
"in no way indicates any shift in Puerto Rico's historical and
constitutionally supported commitment to honoring its financial
But Duane McAllister, a fund manager at BMO Global Asset
Management in Milwaukee, said investor perception was key.
"The fact that the target is the public corporations today
leads to the view that, if it is insufficient, maybe other debt
that is viewed more securely may ultimately be challenged," he
Standard & Poor's Ratings Service on Friday put the entire
commonwealth's general obligation and appropriation debt under
review for potential downgrades. On Monday, it added the Puerto
Rico Aqueduct and Sewer Authority (PRASA). That authority has
said it will not restructure.
Years of population decline and economic weakness have taken
a toll on Puerto Rico, saddling it with about $70 billion of
debt and shrinking its revenue. Governor Alejandro Garcia
Padilla signed a law declaring a fiscal emergency less than two
weeks ago, and this spring, after all three rating agencies had
cut its credit score to junk, the territory hired Wall Street
On Monday, the governor blamed former commonwealth
administrations for allowing the corporations to overspend.
"My administration is not going to permit our families to
suffer because of the wrong decisions of the past nor let old
debts restrict the economic revival of the country," he said.
PRASA, PREPA and the Highways and Transportation Authority
have a combined $20 billion of debt outstanding.
Moody's Investors Service said on Monday the law shows the
commonwealth's "diminished willingness" to support the
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.
Franklin Funds, a unit of Franklin Resources Inc,
holds about $907.2 million of PREPA revenue bonds and
Oppenheimer's Rochester funds hold about $821.4 million of PREPA
bonds, according to the complaint.
In Monday trading, yields on PREPA revenue bonds reached a
record high of 14.864 percent, or 36.875 cents on the dollar.
PREPA is facing the expiration of millions of dollars in
lines of credit. If it cannot extend the lines, the GDB may not
have enough cash to keep it afloat.
PREPA also has a bond payment of approximately $204 million
in principal and $179 million in interest due Tuesday, according
to Fitch Ratings. David Millar, a Puerto Rico government
spokesman, said "the trustee has sufficient funds" to cover it.
PREPA could eventually default, said Western Asset
Management Portfolio Manager Robert Amodeo in an interview with
Reuters Insider. reut.rs/1jCZDD2
The fate of the credit line extensions will determine
whether PREPA restructures, said a person close to the matter,
adding the GDB will not lend large amounts for fear of becoming
Since the law passed, the price of PREPA bonds maturing in
20 years or beyond has dropped by about 15 percent, according to
the funds' complaint. It added the price of bonds maturing over
the next four years had fallen as much as 40 percent.
Conversely, prices on $3.5 billion of junk
bonds Puerto Rico sold this year have rallied because investors
now expect the commonwealth to not bail out its public
corporations. On Monday the price of those bonds rose to 90.5
cents, yielding 9.016 percent.
"A case can be made that isolating the problems of an issuer
such as PREPA from the Treasury strengthens the central
government," said Alan Schankel managing director at Janney
Capital Markets in a note on Monday. "But ... it calls into
question political leaderships' willingness to stand by other
debt, including GOs."
Bond insurers with exposure to Puerto Rico were also hit.
MBIA Inc shares fell 4.9 percent on Monday while Assured
Guaranty was down 1 percent.
(Additional reporting by Karen Pierog in Chicago; Nicholas
Brown and Edward Krudy in New York; Reuters in San Juan; Editing
by Tom Brown and Andrew Hay)