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 thanks 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 debt load.
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.
Approximately $204 million in principal and $179 million in interest
was due on PREPA bonds. A source familiar with the matter said the
trustee made the payment on Tuesday.
An official with a major U.S. asset manager holding PREPA bonds said
the firm expected to be paid based on statements by Puerto Rico
officials. Still, the firm's custodian had advised that if a
transfer had been made, it had not yet cleared.
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 unconstitutional.
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.
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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,"
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
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 you loans'."
(Additional reporting by Edward Krudy in New York, Reuters in San
Juan and the Bangalore newsroom; Editing by Tom Brown)
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