Puerto Rico’s debt has been downgraded in the wake of the new law passed by the commonwealth that enables its public corporations to restructure their bonds.
Moody’s Investors Service cut Puerto Rico’s general obligation debt from Ba2 to B3 and downgraded its other major issuers, including the Government Development Bank, PREPA, the aqueduct and sewer authority, highway authority and COFINA.
The new law, Moody’s said, “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.”
Despite the market trepidation, all bond payments maturing Tuesday were paid.
According to David Chafey, chairman of the Government Development Bank for Puerto Rico, payments included $721.97 million to service general obligation bonds and $417.56 million for bonds issued by PREPA, the electric utility.
Funds sue
Meantime, Franklin Templeton Investments and OppenheimerFunds Inc. filed suit in U.S. District Court for the District of Puerto Rico challenging the new law.
Passed last week, “The Puerto Rico Public Corporations Debt Enforcement and Recovery Act” was designed to enable certain issuers to restructure their debt. The government said it was seeking to provide an orderly, statutory process that would allow public corporations to handle their debts fairly and equitably while ensuring the continuity of essential services.
Unlike federal law, there were no provisions in Puerto Rico law for negotiations between its public corporations and their creditors should the need arise to change the terms or structure of a public corporation’s obligations.
The GDB said the law was designed as an “option of last resort” that fills gaps in the current law.
The two large investment firms, however, say it violates the U.S. Constitution.
“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.” Oppenheimer said in a statement.
An ‘unconstitutional taking’
In the court filing, the firms say Congress has the exclusive power to enact such legislation. In addition, the law amounts to an unconstitutional confiscation of property because it allows the power authority to seize collateral securing its bonds.
Gov. Alejandro Garcia Padilla called Moody’s recent downgrade “unfair to the people of Puerto Rico and disregards the hard work undertaken to date to get the finances of the Commonwealth in order. I’m extremely disappointed that Moody’s has ignored the facts in their decision to downgrade Puerto Rico’s credit.”