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 The measure, which earlier passed Puerto Rico's legislature, lets
Governor Alejandro Garcia Padilla declare a moratorium on any debt
payment he deems necessary and could alter the structure of the
Government Development Bank (GDB), the island's primary fiscal
agent.
"This legislation provides us with the tools to address the highest
priority of needs — providing essential services to our people —
without fear of retribution," Garcia Padilla said in a statement.
Puerto Rico, burdened by a $70 billion debt load it says it cannot
pay, a 45 percent poverty rate and shrinking population, faces
economic collapse without measures that either change its laws or
involve an agreement with creditors.
Wednesday's emergency law was rushed into existence as the GDB faces
possible default on a $422 million debt payment due on May 1. Garcia
Padilla had said he would consider a debt moratorium ahead of that
deadline.
GDB and its creditors are trying to work out a consensual
restructuring.
 But the new law could spark "a new era of litigation" from
creditors, said Daniel Hanson, an analyst with Height Securities.
"We believe the overwhelming majority of Puerto Rican issuers have
violated their creditors' rights," he said in a Wednesday note.
REBUKE AND PRAISE
Some GDB creditors on Monday sued to prevent a run on the bank,
asking a federal court to block depositors from taking out their
money while talks continue.
The passage of the law drew a quick rebuke from some creditors.
Stephen Spencer, a financial adviser to bondholders including
OppenheimerFunds and Franklin Advisers, said it might violate the
terms of a prior restructuring deal at PREPA, the island's power
utility.
That deal, under which creditors agreed to take 15 percent repayment
cuts, "should be explicitly preserved, rather than being cast into a
state of uncertainty," Spencer said in a statement. He said the law
could "close the door to anyone extending new credit to Puerto Rico,
seriously impeding its ability to meet citizens' needs."
In a statement on Wednesday night, PREPA Executive Director Javier
Quintana Mendez said the agreement "remains in place and should not
be negatively affected by the new law."
"We continue working in collaboration with our creditors, focused on
the implementation of our recovery plan," Quintana said.
A second group of creditors holding debt issued by Puerto Rico's
sales tax authority, COFINA, expressed support for the debt freeze
bill, citing delays in legislative efforts by federal lawmakers in
Washington to address Puerto Rico's crisis.
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"With entrenched private institutions obstructing the legislative
process in Washington, it is understandable that Puerto Rican
leaders are taking steps to equip the island with the tools it
needs," Susheel Kirpalani, counsel to the COFINA Senior Bondholders
Group at law firm Quinn Emanuel, said.
A rescue bill being drafted by the U.S. House of Representatives
Natural Resources Committee so far uses U.S. bankruptcy rules as
guidance for a solution, something many creditors oppose. Hearings
are expected next week in Washington.
Relations between Puerto Rico and its creditors are growing tenser
as major debt payments in May and July loom.
On Tuesday, some of Puerto Rico's general obligation bondholders
criticized the debt moratorium law, at the time still being debated
by lawmakers, saying Puerto Rico was ignoring their offer to
restructure debt by extending principal payments.
Garcia Padilla appeared to fire back on Wednesday, saying "our
creditors have engaged in public relations efforts that contain
falsehoods about their proposed ‘fixes’ – all of which are aimed at
misinforming the public and dissuading Congress from doing what is
right for our 3.5 million American citizens."
Puerto Rico's benchmark 2035 GO bond <74514LE86=MSRB> is down
sharply since talk of a debt moratorium bill surfaced earlier this
week. On Wednesday the bond fell 2.45 points in price to bid 63.299,
yielding 13.33 percent, according to Municipal Securities Rulemaking
Board data.
"Puerto Rico's problems stopped being legal problems and they've
started being a math problem... at the end of the day Puerto Rico
can't pay," said Nicholas Venditti, portfolio manager at Thornburg
Investment Management in Santa Fe, speaking at a luncheon for
reporters in New York.
(Reporting by a contributor in San Juan and Nick Brown, additional
reporting by Hilary Russ in Nwe York; Writing by Daniel Bases and
Nick Brown; Editing by Meredith Mazzilli and Andrew Hay)
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