SAN JUAN Puerto Rico (Reuters) - Puerto Rico’s top finance officials said on Thursday that the U.S. commonwealth will step up efforts to explain a new restructuring law to investors after a series of ratings downgrades and a rout in the island’s bonds effectively shut it out of markets.
Ratings agencies slapped Puerto Rico with steep, across-the-board downgrades after it passed the law allowing public corporations to restructure their debt. The downgrades have affected previously higher rated bonds and are making it harder for Puerto Rico to persuade investors that it in can isolate its problems in peripheral entities.
“We knew that there was the possibility of downgrades, especially the public corporations,” Treasury Secretary Melba Acosta said in a joint interview with Government Development Bank Board President David Chafey. “Nevertheless, we were sincerely surprised by the excessive action of Moody‘s.”
Officials said the GDB would announce an investors teleconference soon, probably next week, as part of the effort to regain control of the discourse and explain the law and Puerto Rico’s intentions to investors.
“If you are talking about tomorrow, access is restricted. I am confident that will change after our communications with investors and analysts,” Chafey said.
Puerto Rico has struggled to counter the negative sentiment that engulfed its bonds following the passage of the law in late June. What was supposed to be a law aimed solely at the island electric power authority PREPA has been unfairly extrapolated to all the island’s $70 billion debt, the officials said.
Moody’s was the first to act, cutting Puerto Rico’s general obligation debt three-notches further into junk on July 1. On Wednesday, Fitch slashed it tax-revenue, or Cofina, bonds further to junk from investment grade.
Standard & Poor’s has put Puerto Rico on warning for a downgrade. It cut its rating on PREPA bonds four notches further into junk on Wednesday and has warned other high rated debt such as the Cofina bonds could be cut.
Acosta said that Puerto Rico moved ahead with enacting the ‘Recovery Act’ after its troubled electric utility failed to reach a deal to extend some $671 million in credit lines maturing this summer that is used to buy fuel to produce electricity.
The law was attacked by some bondholders who are suing to have it annulled.
“We are talking about the passage of a law, and until now, no entity has taken advantage of it. They conclude that if a public corporation does file under this law, then at the end of the road the entire government will take advantage of its provisions and we believe the opposite. It isolates the problems in the public corporations,” she said.
Persuading investors that the law isolates the public corporation will be key in reestablishing market access, which Chafey acknowledges has probably been shut off in the current climate. Puerto Rico probably will not need to refinance debt until next year after a mammoth $3.5 billion bond sale last March.
Acosta said the law was needed as Puerto Rico’s public entities are not eligible for bankruptcy under Chapter 9 of U.S. bankruptcy law, something she described as discriminatory.
“If the government has the opportunity to put Puerto Rico on equal footing with the other states, an opportunity for whatever reason the federal government did not give us, why not do it?,” Acosta said.
Reporting by Reuters in Puerto Rico; Writing by Edward Krudy, Editing by Bernard Orr