Puerto Rico Governor Alejandro Garcia Padilla signed a bill into law allowing certain public corporations to restructure debt, a move that may prompt Standard & Poor’s to lower the island’s speculative-grade rating even more.
The company put the commonwealth’s general-obligation bond rating on CreditWatch yesterday with negative implications, meaning it could be lowered within 60 to 90 days after the bill was signed. Garcia Padilla signed it today, Yanira Hernandez, his spokeswoman, wrote in an e-mail.
The law, sought by the governor and passed by lawmakers June 25, would allow public utilities such as Puerto Rico Electric Power Authority to negotiate with bondholders to reduce their debt loads. Prepa, struggling with $10 billion of debt, is seeking to extend lines of credit with banks and could be one of the first borrowers to rely on the plan.
Garcia Padilla’s proposal “is indicative of the growing economic and fiscal challenges for the commonwealth as a whole, which could lead to additional liquidity pressures,” S&P analyst David Hitchcock said in a statement.
The legislation may also signal “a potential shift in the commonwealth’s historically strong willingness to continue to meet its obligations to bondholders,” Hitchcock said in a report. The legislation excludes general-obligation bonds.
S&P, along with Moody’s Investors Service and Fitch Ratings, cut the commonwealth’s general-obligation bonds to speculative grade beginning in February and followed with similar downgrades to its utilities.
Investors have been anticipating a potential debt restructuring since August on concern that the island of 3.6 million people would be unable to repay its obligations. Its unemployment rate of 13.8 percent is more than double the U.S. average.
Responding to S&P’s move, the Government Development Bank for Puerto Rico said the new law “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.” The bank said it “continues to work to support the long-term self-sufficiency of the commonwealth and its corporations.”
To contact the editors responsible for this story: Stephen Merelman at email@example.com Pete Young, Stephen West