By Dow Jones Business News,
June 30, 2014, 05:18:00 PM EDT
By Aaron Kuriloff
Puerto Rico's power authority bond prices continued to sink Monday as investors grew concerned that the agency is
running out of cash to pay off bonds and bank loans due this week.
After trading at around 55 cents on the dollar at end of last week, some of the Puerto Rico Electric Power
Authority's longer-term bonds are trading at about 45 cents on the dollar Monday.
The power authority, which has about $8.8 billion in debt, doesn't have the money to repay some $146 million due to
Citigroup Inc. between July 3 and mid-August after a line of credit matured in January, said Standard & Poor's Ratings
Services, one of three ratings firms to slash the ratings on the commonwealth's utilities last week. The agency will
also owe Scotiabank de Puerto Rico$525 million on August 14 if it can't renew that line of credit. S&P said the
island's government might not step in if the loans aren't renewed.
The power authority uses the money to purchase oil for power generating units that produce up to 60% of Puerto
Rico's power, S&P said. About $200 million of the power agency's bonds are also maturing Tuesday and it owes $10 million
to Citigroup Inc. this week.
"We'll have to see if they make it," said Chris Ryon, managing director at Santa Fe-based Thornburg Investment
Management Inc., which oversees about $10 billion in municipal assets. He doesn't currently hold Puerto Rico bonds. "If
you were restructuring, the first thing you'd want to do is keep all the cash you can, because you're going to have to
buy fuel for the electrical system," he said.
A trustee looking after the power authority debt has sufficient funds to make the July 1 payment to bondholders,
said a spokesman for the Government Development Bank. The power authority is evaluating how best to serve the people of
Puerto Rico now that the government has provided its utilities a path to restructuring through the so-called Recovery
Act, the agency said in a statement.
Investors' angst over the power authority is the latest chapter in Puerto Rico's troubled financial saga, which has
dragged on for the past year as its economy struggles and investors are less willing to lend to the island and its
public utilities. Puerto Rico has about $73 billion in total obligations, including that owed by its so-called public
corporations, such as the power authority. Its debt is widely held by mutual funds and individuals, some investors fret
that troubles there could escalate and spook buyers in the broader $3.7 trillion municipal bond market.
Puerto Rico lawmakers last week approved legislation that allows some agencies such as the island's power, water
and transportation authorities to overhaul their debt. Those agencies have a combined $19.4 billion in debt outstanding,
according to estimates from Barclays PLC.
Franklin Templeton Investments and OppenheimerFunds Inc., which own $1.7 billion in debt from the agency, have
filed court papers challenging the law, which doesn't apply to Puerto Rico's general obligation or sales-tax bonds.
John Mousseau, director of fixed income at Cumberland Advisors, which manages about $2.2 billion in Sarasota,
Florida, said the Puerto Rican government is trying to separate is general obligation bonds from the troubled utilities
and reassure investors the power authority's problems wouldn't spread.
Investors traded some general obligation bonds from the island's $3.5 billion March sale at 89.75 cents on the
dollar yesterday, up from about 85.5 cents before the legislation.
"They're saying `We're pushing the agency debt over here and ensuring we have enough to pay the general obligation
debt over there," Mr. Mousseau said. "If you've listened to some of the pronouncements from the government, they've
always stressed the primacy of paying the commonwealth's general obligation debt."
Shawn O'Leary, senior research analyst at Nuveen Investment Management LLC, said Puerto Rico may have a hard time
fencing off its general obligation bonds.
"Really, this is about preserving liquidity at the public corporations," he said. "Even with this action Puerto
Rico still needs to credibly balance its budget and it needs economic recovery. Absent those two things, the general
obligations remain very much in doubt.
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