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June 28 (Bloomberg) -- 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. Two investment companies promptly filed suit today challenging the new law.

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.

Commonwealth’s 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.

Two investment companies, Oppenheimer Holdings Inc. and Franklin Resources Inc., sued today in U.S. District Court in Puerto Rico, asking a judge to declare the new law unconstitutional.

The complaint cites a provision of the U.S. Constitution that gives Congress the power to create “uniform laws on the subject of bankruptcies throughout the United States.” Because the Puerto Rico measure is, “in both form and substance, a bankruptcy law enacted by the commonwealth,” it’s unconstitutional, the companies said in their filing.

Fund Holdings

Franklin Funds holds $907.2 million of Prepa debt and Oppenheimer Rochester Funds hold $821.4 million, according to the filing. Since the commonwealth’s Senate approved the bill on June 25, prices of Prepa bonds maturing within four years have dropped by as much as 40 percent, the investment firms state in the filing. Longer-dated Prepa bonds maturing in 20 years or more have fallen by 15 percent.

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.”

The funds’ case is Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, 14-cv-01518, U.S. District Court, District of Puerto Rico (San Juan).

To contact the reporters on this story: Michael B. Marois in Sacramento at; Michelle Kaske in New York at

To contact the editors responsible for this story: Andrew Dunn at; Stephen Merelman at Stephen West

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