WRAPUP 2-Puerto Rico worries deepen on lawsuits, bond selloff
(Recasts top, adds details about law, PREPA bonds, background of Puerto Rico's fiscal situation )
By Tim McLaughlin and Lisa Lambert
June 30 (Reuters) - Puerto Rico's troubles continued to worsen on Monday after mutual funds holding about $1.7 billion in its debt sued the commonwealth while other investors sold the bonds on concerns the island's finances could deteriorate further.
The flashpoint for the lawsuit brought by two large institutional holders is a law passed last week that allows Puerto Rico's public corporations - primarily its troubled electric power authority known as PREPA - to restructure their debt. It sparked a sharp selloff in these agency bonds that extended on Monday.
Under its constitution, Puerto Rico does not have the power to enact a bankruptcy law to adjust its debt but island authorities say the entities in question are not subject to that rule. The funds disagree and their reaction raises the possibility of a protracted legal battle over Puerto Rico's obligations to its debtholders.
The law specifically excludes the commonwealth and the Government Development Bank. Still, it has stoked concerns about the potential for a larger restructuring of commonwealth debt.
On Monday, Puerto Rico's financial leadership raced to reassure investors the law "in no way indicates any shift in Puerto Rico's historical and constitutionally supported commitment to honoring its financial obligations."
Standard & Poor's Ratings Service on Friday put the entire commonwealth's general obligation and appropriation debt on Creditwatch with negative implications. On Monday, it added the Puerto Rico Aqueduct and Sewer Authority (PRASA) to the review. That authority has said it will not restructure under the law.
Years of population decline and economic weakness have taken a toll on Puerto Rico, saddling it with about $70 billion in debt and shrinking its revenues. Governor Alejandro Garcia Padilla signed a law declaring a fiscal emergency less than two weeks ago, and this spring, after all three rating agencies had cut its credit score to junk, the territory hired Wall Street restructuring consultants. Continuación...