Oppenheimer Rochester Funds and Franklin Funds sued Puerto Rico to overturn the public corporation debt restructuring bill Gov. Alejandro García Padilla signed Saturday.
The investment firms filed the case Sunday in the Puerto Rico District of the United States District Court. The suit also names García Padilla, the Puerto Rico Electric Power Authority and an agent for the Government Development Bank of Puerto Rico as defendants.
In the complaint, the firms' lawyers say that there are indications that the PREPA will file for restructuring "imminently." Franklin Funds has $907 million in PREPA bonds and Oppenheimer Rochester Funds has $821 million in the bonds, the lawyers said.
"Under the [United States] Constitution, the commonwealth has no power to enact a bankruptcy law for the adjustment of the debts of its instrumentalities and public corporations where the Congress of the United States has enacted the Bankruptcy Code, excluded Puerto Rico's instrumentalities from its reach, and explicitly indicated that states have no power to enact their own laws providing for the adjustment of such debts," the lawyers wrote in the complaint.
The lawyers also wrote that the restructuring bill would violate the Fifth and Fourteenth Amendments of the Bill of Rights and Article 1, Section 10 of the U.S. Constitution.
The firms, through their lawyers, ask the court to declare the restructuring act to be illegal.
Asked about the suit, an Oppenheimer Funds spokesperson said, "We believe it is our responsibility to stand up for the rights of bondholders and our shareholders when the unlawful acts of issuers or others threaten those rights."
Franklin Templeton spokesperson Stacey Coleman said, "Our position is outlined in our filing, and we do not have any additional comment at this time, other than to emphasize that our focus continues to be on doing what is in the best interest of our fund investors - we are responsible for protecting the value of their investments." Franklin Templeton Investments operates Franklin Funds.
Municipal Market Advisors managing director Robert Donahue reported Monday in MMA's Outlook that another group of mutual funds is preparing a suit against the commonwealth over the restructuring bill.
Regarding PREPA's status, on Friday Fitch Ratings managing director Denis Pidherny said that he was unsure if PREPA had forwarded money to its trustee needed to make a major debt service payment due Tuesday. The money was due to the trustee, U.S. Bank National Association on June 25, according to Pidherny.
A spokesman for the Government Development Bank of Puerto Rico said on Monday that the money was with the trustee.
PREPA expected to pay $577 million for its debt service in fiscal 2014, according Pidherny. PREPA makes its debt service payments on January 1 and July 1.
In other Puerto Rico credit news, Standard & Poor's put on negative creditwatch its ratings of Puerto Rico's general obligation and appropriation debt ratings. It also put on negative creditwatch the ratings of the bonds from Puerto Rico Employee Retirement System, Puerto Rico Infrastructure Finance Authority, Puerto Rico Convention Center District Authority, and Puerto Rico Sales Tax Financing Corp. (COFINA).
"We believe that the introduction of the bill by Governor Alejandro García Padilla and its approval by the legislature is indicative of the growing economic and fiscal challenges for the commonwealth as a whole, which could lead to additional liquidity pressures in the long term and a potential shift in the commonwealth's historically strong willingness to continue to meet its obligations to bondholders," said S&P credit analyst David Hitchcock.
S&P also put the bonds of the Puerto Rico Highways and Transportation Authority and the Puerto Rico Aqueduct and Sewer Authority on creditwatch negative.
"We are disappointed that S&P has placed Puerto Rico's GO and appropriation debt on creditwatch as a result of the Puerto Rico Public Corporations Debt Enforcement and Recovery Act ('the Recovery Act')," said GDB Chairman David Chafey and Puerto Rico Secretary of the Treasury Melba Acosta Febo in a written statement. "The Recovery Act explicitly excludes the commonwealth and in no way indicates any shift in Puerto Rico's historical and constitutionally supported commitment to honoring its financial obligations. It is intended to provide a controlled and orderly process through which a public corporation can become financially self-sufficient.
"Further, the Recovery Act protects Puerto Rico's GO debt by giving public corporations the opportunity to address their financial challenges once and for all and thereby no longer depend on the General Fund."
S&P has the commonwealth's GO debt at BB-plus, one notch higher than Fitch Ratings and Moody's Investors Service rates it.
Meanwhile, the GDB announced Friday that the commonwealth's Economic Activity Index was down in May 0.16% compared to April. Compared to May 2013, May's value was down 1.1%.
Since August the index is up 1.1%. The economy has been growing at 1.5% annual rate since August.
In Friday's index report, total non-farm payroll employment was up in May by 0.4% compared to a year earlier. However, in the same period electric power consumption declined 3.3%, gasoline consumption went down 0.5%, and cement sales contracted by 14.2%.
In still another Puerto Rico matter of interest to bondholders, as of 3:30 p.m. EDT on Monday the Puerto Rico Senate had approved the fiscal 2015 budget. The House of Representatives was expected to vote on it later Monday afternoon. The governor is expected to sign it on Tuesday, with fiscal 2014 budget spending patterns governing the first few hours of fiscal 2015.
