(Recasts top, adds details about law, PREPA bonds, background
of Puerto Rico's fiscal situation )
By Tim McLaughlin and Lisa Lambert
June 30 Puerto Rico's troubles continued to
worsen on Monday after mutual funds holding about $1.7 billion
in its debt sued the commonwealth while other investors sold the
bonds on concerns the island's finances could deteriorate
The flashpoint for the lawsuit brought by two large
institutional holders is a law passed last week that allows
Puerto Rico's public corporations - primarily its troubled
electric power authority known as PREPA - to restructure their
debt. It sparked a sharp selloff in these agency bonds that
extended on Monday.
Under its constitution, Puerto Rico 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 funds disagree and their reaction raises the
possibility of a protracted legal battle over Puerto Rico's
obligations to its debtholders.
The law specifically excludes the commonwealth and the
Government Development Bank. Still, it has stoked concerns about
the potential for a larger restructuring of commonwealth debt.
On Monday, Puerto Rico's financial leadership raced to
reassure investors the law "in no way indicates any shift in
Puerto Rico's historical and constitutionally supported
commitment to honoring its financial obligations."
Standard & Poor's Ratings Service on Friday put the entire
commonwealth's general obligation and appropriation debt on
Creditwatch with negative implications. On Monday, it added the
Puerto Rico Aqueduct and Sewer Authority (PRASA) to the review.
That authority has said it will not restructure under the law.
Years of population decline and economic weakness have taken
a toll on Puerto Rico, saddling it with about $70 billion in
debt and shrinking its revenues. 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, Padilla blamed the commonwealth's former
government administrations for allowing the public corporations
to overspend. The government has repeatedly stepped in to help
the public corporations.
"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 in 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 in revenue bonds issued by Puerto
Rico Electric Power Authority. Oppenheimer's Rochester funds
hold about $821.4 million in the PREPA bonds, according to the
The law has spurred a massive sell-off in revenue bonds
issued by Puerto Rico's electric authority, the most troubled of
the public corporations. In Monday morning trading, PREPA yields
reached a record high of 12.627 percent, or 44.85 cents on the
PREPA is facing the expiration of millions of dollars in
lines of credit. If it cannot extend the lines, the Government
Development Bank may not have enough cash to keep it afloat. At
the same time, it has a bond payment due on Tuesday. David
Millar, a Puerto Rico spokesperson, said "the trustee has
sufficient funds" to cover it.
Since the law passed, the price of long-dated PREPA bonds,
or those maturing in 20 years or beyond, have dropped by about
15 percent, according to the complaint. It added short-dated
bonds, those maturing over the next four years, have fallen as
much as 40 percent.
Conversely, prices on $3.5 billion junk
bonds Puerto Rico issued this year have rallied since the law
was introduced on Wednesday because investors now expect the
commonwealth would not bail out struggling corporations. On
Monday the price of those bonds rose to 90.5 cents, yielding
Puerto Rico is one of the largest issuers of municipal
bonds. Under its constitution, it cannot enact a bankruptcy law
to adjust its debts. The complaint contends Puerto Rico passed
an act modeled after title 11 of the bankruptcy code used by
corporations to reorganize.
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 and Edward
Krudy in New York; Editing by Tom Brown and Andrew Hay)