(Adds S&P downgrades on Friday afternoon, government reply; GDB investor conference)
By Lisa Lambert
WASHINGTON, July 11 (Reuters) - Prices on Puerto Rico debt drifted higher on Friday and trading of the junk-rated bonds slowed, calming some of the recent market turbulence inspired by the island's troubled power authority.
Late on Thursday the cash-strapped utility, the Puerto Rico Electric Power Authority (PREPA), disclosed it had used about $41.6 million from its reserves to make a July 1 bond payment of $471.56 million. The filing was a worrying indication of the independent agency's financial deterioration to investors who believe PREPA will soon default or restructure its debt.
But on Friday prices on PREPA revenue bonds maturing in 2040 reached 42.125 cents, the highest since 45.625 cents on July 1. That was equal to a yield of 13.149 percent. By early afternoon there were only three trades in the bonds, Municipal Securities Rulemaking Board data shows. In comparison the bonds switched hands 25 times on Thursday.
Meanwhile, the price on the commonwealth's general obligation bonds sold in March with an 8 percent coupon reached 86.782 cents, equal to a 9.461 percent yield, on Friday. That nearly erased the week's price drop on the bonds. The highest price the debt fetched in secondary trading on Monday was 87 cents. It then dropped swiftly, with the highest price on Tuesday only 85.6 cents, or a 9.608 percent yield.
Early on Friday the commonwealth reported that during fiscal 2014 it brought in $9.037 billion in revenue, a 5.5 percent increase from the previous year.
Still, the recent price plummet has affected the $3.7 trillion municipal market, especially the mutual funds that hold island debt. The rating agencies cut Puerto Rico bonds even further into junk after the commonwealth passed a law on June 26 allowing its most troubled public agencies to restructure debts in a process akin to bankruptcy.
And they are keeping the pressure on.
On Wednesday, Standard & Poor's Ratings Services slashed its PREPA rating four notches to the speculative grade of B-.
"Declines in pricing of Puerto Rico bonds added further pressure to already depressed net asset values (NAVs) of Puerto Rico mutual funds," Fitch Ratings said on Friday. "Fitch-rated Puerto Rico fund managers are reacting swiftly by adding to collateral supporting rated notes and deleveraging where needed."
Fitch had cut its rating on senior sales-tax backed (COFINA) bonds by nine notches to junk at "BB-" from investment grade on Wednesday.
Late Friday afternoon, S&P also dropped its ratings on COFINA bonds by several notches, but they held on to lower-investment grade ratings. At the same time, S&P again cut its rating on Puerto Rico's GO bonds one notch deeper into junk, to BB, and its rating on the Government Development Bank (GDB) one notch to BB-minus.
The new law "specifically excludes the commonwealth, all of its municipalities, the GDB and COFINA and in no way alters our commitments to honor our GO, COFINA and other related credits," said GDB chairman David Chafey and Treasury Secretary Melba Acosta Febo in a joint statement after S&P's Friday downgrades.
The GDB also said on Friday that it will hold a webinar to update investors on July 17.
Skittish investors are also moving into Puerto Rico bonds guaranteed by insurance companies.
One of the most actively traded municipal bonds this week was a Puerto Rico refunding issuance maturing in 2041 that is backed by Assured Guaranty Municipal Corp, Municipal Securities Rulemaking Board data shows. On Friday the price on that bond reached 69.15 cents, the highest since June 27, with a yield of 7.742 percent. (Editing by Phil Berlowitz and Ken Wills)