Investment firms OppenheimerFunds Inc. and Franklin Templeton (BEN) have filed a lawsuit claiming that Puerto Rico’s new law, which lets certain government agencies restructure their debt, violates the constitution. Lawmakers in Puerto Rico approved the bill last month.
Aside from its power agencies, the entities that would be allowed to restructure the debt under the new law include Puerto Rico’s water and transportation agencies. Collectively, all of the agencies have about $19.4 billion in outstanding bonds. The Act does not have provisions for restructuring tax-backed bonds and general-obligation bonds.
The two fund managers together hold about $1.7 billion in Puerto Rico Electric Power Authority debt. They want the legislation, known as the Public Corporations Debt Enforcement and Recovery Act, blocked.
Puerto Rico’s Government Development Bank is backing the new law. The Bank said that the U.S. territory has the right to pass its own debt enforcement legislation over “areas not covered by federal law.” Franklin Templeton and Oppenheimer Funds, however, are contending that the new act is a bankruptcy law, which “treads” on Congress’s sole authority to enact this type of law.
The plaintiffs also claim that the legislation allows for the unconstitutional taking of property, since it would let the Puerto Rico Electric Power Authority, among others, take the collateral securing the bonds. Franklin Templeton and Oppenheimer Funds say they are standing up for bondholder rights and their shareholders with their lawsuit.
After the law was approved short-dated bonds that the Puerto Rican power company issued dropped almost 40% in value. Currently, the Power Authority ‘s outstanding debt is approximately $8.8 billion. These bonds, and the bond debt of other Puerto Rican agencies, are separate from the territory’s’ general obligation debt. In total, the island owes about $73 billion in debt.
Also, in the wake of the bill’s passing, Moody’s Investor Service (“Moody’s”) lowered its rating of $14.4 billion of Puerto Rico’s general-obligation debt. Moody’s reduced these general obligations bonds’ rating by three notches, going from B2 to Ba2. This significant ratings change embeds Puerto Rico’s bonds even further in junk territory.
Moody’s also downgraded bonds that the commonwealth’s sales-tax revenue is backing from Baa1 to Ba3, as well reduced ratings on the Puerto Rico Electric Power Authority, which is now a Caa2 from a Ba3. The credit rating agency said that letting the island restructure bonds put out by public entities could cause the bondholders to lose money.
Following the downgrade, some of the general obligation bond prices dropped. Another ratings agency, Standard & Poor’s Rating Services (“S&P”), has placed Puerto Rico ratings on its CreditWatch. It too is thinking of making a ratings downgraded. However, S&P still rates Puerto Rico’s sales-tax-backed bonds investment grade with an AA+.
Puerto Rico Muni Bond Fraud Lawyers
Our Puerto Rico bond fraud lawyers work with investors who have lost money in either Puerto Rico bonds or bond funds with exposure to Puerto Rico debt (including UBS’s proprietary closed-end bond funds sold only to Puerto Rico residents). Shepherd Smith Edwards and Kantas, LTD LLP currently represents dozens of investors in the U.S. and Puerto Rico. Contact our securities law firm today for a free, no obligation consultation.
Moody’s Cuts Puerto Rico Rating Three Notches, The Wall Street Journal, July 1, 2014
U.S. bond funds sue Puerto Rico, worried about bankruptcy threat, Reuters, June 30, 2014
Muni bond funds face ongoing Puerto Rican woes, InvestmentNews, June 30, 2014
Public Corporations Debt Enforcement and Recovery Act (PDF)
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UBS AG Under Criminal Investigation Over Puerto Rico Bond Fund Sales, Stockbroker Fraud Blog, June 21, 2014
FINRA Sees 10% Rise in Arbitration Cases, Puerto Rico Bond Claims A Factor, Stockbroker Fraud Blog, April 27, 2014
Hedge Funds Are Moving in on Municipal Debt, Including Puerto Rico Debt, Institutional Investor Securities Blog, November 15, 2013