Puerto Rico general obligation bonds fell in Monday trading after a federal court
Yields on Puerto Rico GO 8s surged to a high yield 10.235% in Monday morning trading, from Friday's high of 9.912%, while the Puerto Rico Electric Power Authority, which had been expected to reorganize under the law, rallied.
Federal Judge Francisco Besosa, ruling on separate challenges by Franklin Templeton and Oppenheimer Rochester Funds, and Bluemountain Capital Management LLC, found the island's Recovery Act enacted in June was inconsistent with the U.S. Constitution and U.S. law and was preempted by the federal bankruptcy code.
"A broad, disorderly restructuring is increasingly likely unless the U.S. Congress moves forward with a Chapter 9 extension," Municipal Market Analytics managing director Robert Donahue wrote after the decision in MMA's Weekly Outlook. "We now believe all Puerto Rico debts, including GO's, are on the table."
PREPA has about $8.6 billion of bond debt, while Puerto Rico has more than $70 billion of public sector debt.
Puerto Rico's government said Monday afternoon that it would appeal the decision in the Court of Appeals for the First Circuit in Boston.
"After analyzing the decision made by Federal Judge Francisco Besosa, we understand that it is incorrect in law and that it has the effect of leaving Puerto Rico devoid of a legal framework that allows our public corporations to orderly meet their obligations, without affecting the continuity of services that citizens receive," Secretary of Justice César Miranda said.
Puerto Rico's nonvoting representative in the United States House of Representatives, Pedro Pierluisi, said he would re-introduce a bill to make Puerto Rico's municipalities and public corporations eligible for Chapter 9 bankruptcy.
"I intend to reintroduce my Chapter 9 bill next week, and I hope the [Puerto Rico Gov. Alejandro] García Padilla administration will support my efforts to achieve its passage," Pierluisi said on Monday. "I am sure that, if we go to Congress with a single voice to seek the same treatment that the states receive under Chapter 9, we can achieve this objective."
Before the Commonwealth of Puerto Rico pursued the "drastic impairment of contract rights" found in the Recovery Act, Besosa said the Puerto Rico Electric Power Authority should have used other approaches. Among these he noted was an increase of its basic charges, which have not been raised since 1989.
Besosa said PREPA could also collect the $641 million the Commonwealth owes it, reduce its payments to municipalities, reduce inefficiencies in its operations and could attempt to negotiate with its creditors a voluntary reduction in payments.
Besosa said the trust agreement that governed the bonds provided that if PREPA defaulted, the bondholders could accelerate payments, seek the appointment of a receiver, and sue to enforce the trust agreement's terms.
Because of the decision, Donahue said, "the Commonwealth will claim emergency powers to protect key assets, specifically the Government Development Bank," which is facing sizable outflows by June and beyond. "The $2 billion plus petroleum tax-backed Puerto Rico Infrastructure Finance Authority bond deal - a futile, ill-advised attempt that compounds Puerto Rico's unsustainable debt load - is likely doomed," he added. "Without GDB's ability to subsidize deficits, Puerto Rico faces threats to public safety and essential services."
The Commonwealth may also claim these emergency powers because of a demonstrated lack of willingness to pay back its debt, Donahue said. The government showed this lack of willingness when it developed the Recovery Act and there are increasing calls in Puerto Rico for broad debt restructuring, he said.
Finally, the Commonwealth may claim emergency powers because the "clock is ticking," Donahue said. "Weeks before PREPA's March 2nd debt restructuring plan date and the March 31st Forbearance Agreement termination date, the decision deprives Puerto Rico [of] leverage in negotiations to extend creditor agreements."
Chapman Strategic Advisors managing director Jim Spiotto was less pessimistic about the court decision's impact, calling it well-reasoned and unlikely to be overturned.
PREPA had many other options, Spiotto said. Chief among these are negotiations with its creditors. All parties have interests in being realistic and keeping electricity flowing. Historically, troubled public utilities have succeeded in keeping services flowing while negotiating changes in terms to debts and this will likely happen in here, Spiotto said.
About the court decision Spiotto said, "I don't think this hurts the situation. I think it brings clarity."
NewOak managing director Triet Nguyen was neither as positive as Spiotto nor as negative as Donahue. "Fundamentally, nothing has really changed with regard to the default potential on Puerto Rico bonds."
