(Adds Pedro Pierluisi comment, details of ratings action)
By Edward Krudy
July 10 Puerto Rico's willingness and ability to
honor its debts "should be unquestioned," high-ranking
commonwealth officials said on Thursday, the latest attempt to
convince markets that the island is not about to default on $70
billion of debt.
Investors have reacted badly to a new law that allows the
U.S. commonwealth's public corporations, such as the electric
power authority (PREPA), to restructure debt, potentially
forcing large losses on bond holders. Ratings agencies have
slashed the island's debt ratings, sparking a market sell-off.
Commonwealth officials, who were hoping to isolate public
corporation debt of around $20 billion, have struggled to
convince investors that the island's general obligation and tax
revenue, or COFINA, bonds are sound. Thursday's statement sought
to reinforce that point.
"Puerto Rico has repeatedly delivered on its credit
promises, and the willingness and ability of the Commonwealth to
honor its obligations should be unquestioned in light of its
actions over the last 18 months," David Chafey, chairman of the
Government Development Bank, and Treasury Secretary Melba Acosta
Febo said in the joint statement.
The statement comes a day after Standard & Poor's slashed
its rating on PREPA's debt four notches to 'B-', a highly
speculative rating. At the same time, Fitch cut its ratings on a
range of Puerto Rico debt, including GO and COFINA bonds.
Puerto Rico's debt has stabilized after the recent sell-off.
Benchmark general obligation bonds with a maturity of 2035 and a
coupon of 8 percent rose to trade at an average
price of 84.564 cents, with a yield of 9.74 percent.
If island officials are unable to persuade markets that
restructuring will only affect corporations, it may lose market
access and have trouble refinancing debt in 2015.
Chafey and Febo said they stand behind the "Recovery Act."
The law has been challenged by Puerto Rico bondholders,
OppenheimerFunds and Franklin Templeton, in court.
The law has been criticized by Pedro Pierluisi, Puerto
Rico's non-voting member of the U.S. House of Representatives.
"Instead of working in coordination with my office to
determine if Chapter 9 can be amended to give Puerto Rico the
same authority that states have for their instrumentalities, the
governor had his delegation in the Legislative Assembly pass an
150-page bill in less than a day," said Pierluisi.
Credit default swaps of two bond insurers that insure around
$10 billion of Puerto Rico's debt, MBIA Inc and Assured
Guaranty, rose on Thursday.
The cost to insure MBIA debt for five years rose 9.5 percent
in two weeks. On Thursday, the price was quoted at 783 basis
points, up from 715.5 basis points on June 23, according to
Markit. With an upfront payment of 25 percent, it would cost
roughly $32,000 to insure $100,000 of MBIA debt for the first
MBIA's stock fell 1.8 percent to $9.40 on Thursday, trading
at the lowest level in over a year. Assured's share price fell 1
percent to $22.78, around its lowest in five months.
(Reporting by Edward Krudy and Dan Burns; Editing by James
Dalgleish and Dan Grebler)