January 15, 2019 / 3:27 PM / 2 years ago

Move to invalidate Puerto Rico GO bonds sends prices lower

CHICAGO, Jan 15 (Reuters) - Prices on Puerto Rico general obligation bonds dropped on Tuesday in the wake of a move by the U.S. commonwealth’s federally appointed oversight board late on Monday to invalidate the debt.

Bonds due in 2035 with an 8 percent coupon traded in the 48 cents on the dollar range, down from 53.5 cents on Monday.

“They’re getting crushed,” said Greg Saulnier, an analyst at Municipal Market Data, adding that trading in the securities was heavy.

Puerto Rico’s fiscal oversight board announced on Monday that it is asking a U.S. court to wipe out more than $6 billion of GO bonds sold by the island in 2012 and 2014 that were already in default.

That debt had been issued “in clear violation of the Puerto Rico Constitution and should be declared null and void,” according to a board statement. The board, along with the island’s unsecured creditors committee, asked U.S. Judge Laura Taylor Swain, who oversees the island’s bankruptcy cases, to disallow any claims filed to date by owners of these bonds.

With roughly $120 billion in debt and pension liabilities, Puerto Rico and four of its public corporations commenced bankruptcy proceedings in U.S. court in May 2017, under Title III of the so-called PROMESA Act.

A 600-page report commissioned by the oversight board released last August pointed to potential causes of actions over Puerto Rico’s debt crisis, including potential violations of the island’s constitutional debt limit.

Monday’s announcement is the first major action taken by the fiscal panel after considering potential claims arising from the report. (Reporting by Karen Pierog in Chicago and Luis Valentin Ortiz in San Juan Edidting by Matthew Lewis)

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