(Adds statement from Puerto Rico confirming payment and amount)
By Lisa Lambert
WASHINGTON, July 1 Creditors to Puerto Rico's
electricity provider were given a slight respite on Tuesday when
the bonds' trustee made a scheduled payment, but the U.S.
municipal bond market remained worried the Puerto Rico Electric
Power Authority (PREPA) will soon use a new bankruptcy-like
process to restructure its debts.
The law establishing the process has rattled the $3.7
trillion municipal market since it was passed last week and on
Tuesday it prompted Moody's Investors Service to push ratings on
Puerto Rico debt deeper into junk territory.
Puerto Rico bonds are widely held due to their tax exemption
in every state and their high yields, making them a tempting
asset despite the U.S. commonwealth's struggles to cope with a
shrinking economy, chronic budget deficits and a $73 billion
PREPA could be the first corporation to test the law, as it
faces increasing demands for its limited funds, including
payments on expiring lines of credit and fuel purchases. Prices
of its junk-rated bonds plummeted to the record low of 36.815
cents on the dollar, or a yield 14.887 percent.
The flight to Puerto Rico's $3.5 billion junk general
obligation bonds ended as well - with prices falling to a record
low of 84.5 cents or a 9.748 percent yield.
On Tuesday evening, the Chairman of the Government
Development Bank for Puerto Rico David Chafey confirmed all bond
payments maturing on Tuesday had been made, including $721.97
million paid to service general obligation bonds and $417.56
million for the PREPA bonds.
For most of the day, rumors whipped through the municipal
market that bondholders may not receive any money.
The bond trustee is allowed to hold onto funds if it
foresees large expenses looming, and Puerto Rico's new law
allowing public corporations to restructure already threatens to
rack up costs for PREPA. The authority is considered the most
likely corporation to restructure, which could generate legal
bills, and on Sunday mutual funds sued saying the law was
U.S. Bancorp spokeswoman Teri Charest said the bank cannot
comment on clients' accounts.
The fear is that PREPA is the first domino toward the
restructuring of Puerto Rico's debts, a move akin to filing for
bankruptcy, which the territory cannot do. The law passed last
week excludes Puerto Rico and the Government Development Bank.
Puerto Rico has been fighting hard this year to pull its
finances together, after years of population and economic
declines led its revenues to shrink. Late on Monday, it passed a
scaled-down budget for the fiscal year starting on Tuesday, but
recent measures may not be enough to fix its economy.
Meanwhile, Moody's Investors Service cut the island's
general obligation bonds to B2 from Ba2. Citing the
restructuring law, it broadly swung its axe at the ratings of
the Government Development Bank, PREPA, the aqueduct and sewer
authority, the highway authority and even the sales-tax
financing corporation known as COFINA, which is generally
considered the safest Puerto Rico issuer.
The law "signals a depleted capacity for revenue increases
and austerity measures, and a new preference for shifting fiscal
pressures to creditors, which, in our view, has implications for
all of Puerto Rico's debt, including that of the central
government," Moody's said.
PREPA's $250 million line of credit from Citibank has
already expired. On July 3, PREPA is required to pay the bank
$10 million. It must turn over $146 million to the bank through
the end of August. Likewise its $550 million line of credit from
ScotiaBank de Puerto Rico expires next month, putting it on the
hook for $525 million.
In response to the Moody's downgrade, GDB's Chafey said the
bank was "proceeding with focus and determination to continue
strengthening the Commonwealth's financial position and build a
solid foundation for economic prosperity and development."
PREPA is currently negotiating extensions of the lines.
Still, it also must find cash to pay a recent internal loan for
buying fuel and then cover future fuel purchases.
In the past the GDB has stepped in to prop up the
perennially struggling PREPA but now, dealing with its own
liquidity worries, it is staying away. Meanwhile, Governor
Alejandro Garcia Padilla has repeatedly said public corporations
must become self-reliant.
"They're a cash-poor entity and have been for a long time,"
said Shawn O'Leary, senior vice president at Nuveen Asset
Management, which holds $80.6 million of bonds that could be
subject to the legislation. "The difference now is that the
central government and the GDB said, 'We're no longer floating
(Additional reporting by Edward Krudy in New York, Reuters in
San Juan and the Bangalore newsroom, Robin Respaut in San
Francisco; Editing by Tom Brown, Bernard Orr)