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.
Subscribe to WSJ: http://online.wsj.com?mod=djnwires