Puerto Rico bond rally fizzles on court stay of pension reform

Reuters

By Michael Connor

Jan 15 (Reuters) - Puerto Rico bond prices dropped sharply on Wednesday after the Caribbean island's top court halted the rollout of cost-saving reforms to a teachers pension system meant to help heal Puerto Rico's finances.

Yields on Puerto Rico debt ended a week-long fall and backed-up 20 to 45 basis points in secondary trading on Wednesday, according to Municipal Market Data. Price declines were sharpest in intermediate maturities.

"There's always news coming out of Puerto Rico and there's constant concern," said MMD analyst Dan Berger, adding trading was moderate on Wednesday in Puerto Rico's high-yielding and widely held bonds.

Trading in Puerto Rico debt may also have been affected by a report by the Financial Times that some owners of the island's $70 billion of bonds were meeting to discuss Puerto Rico's wobbly finances.

Late on Tuesday, in what Gov. Alejandro Garcia Padilla called a "dangerous decision," the Puerto Rico Supreme Court halted implementation of teachers pension reform. It agreed to hear a lawsuit seeking to overturn the reform passed Dec. 24.

The reform is one of a series of steps the Puerto Rico government has taken to retain its investment-grade credit rating, which stands just a single notch above junk-bond status by all three Wall Street credit rating agencies.

The court appointed a special commissioner to collect evidence, hold a hearing and submit a report by Feb. 7.

"The resolution emitted by the Supreme Court is particularly dangerous in this historic moment in which we live because our will to save the teachers pension system is being evaluated in relation to the country's credit rating," the governor said in a prepared statement.

"The times call for intellectual generosity and historic responsibility from the judicial branch," he added.

The ruling was handed down in the midst of a two-day strike that kept public school classrooms empty to protest the pension system changes.

The lawsuit, filed by the Teachers Association and a number of other plaintiffs, argues that due process was not followed and says the commonwealth government could have taken less onerous measures to shore up the pension system.

The Teachers Pension Fund has a deficit of $10 billion and is expected to run out of cash by 2020 without reforms, officials have said. There are 41,973 participants and 37,996 retired beneficiaries, with the fund receiving just 17 cents for each $1 it needs each year to pay for benefits and operations.

The reform increases employee contributions to 10 percent from 9 percent and pushes up the retirement age, currently as low as 50, to 62 for new employees, and to 55 or 60 for existing employees, depending on years of service.

Law firm Jones Day is hosting a meeting on Puerto Rico in New York for about 200 clients on Thursday, according to a spokesperson for the firm. The meeting is not an official creditors' meeting.

Government finance officials in San Juan said they knew of the New York meeting and described it as nothing extraordinary.

"We made significant progress in implementing our fiscal and economic development plans in 2013, and are determined to continue that progress in 2014," the Government Development Bank said in a statement. "Puerto Rico will take every step necessary to continue honoring its obligations."

The government is planning a return to the municipal bond market by the end of February, as part of efforts to retain its investment grade rating. Officials say the exact timing and size of the deal are still pending. They have said in the past that they would try to raise between $500 million and $1.2 billion through bonds backed by the sales and use tax and sold through the Sales Tax Financing Corporation, known as Cofina.

Both Moody's Investors Service and Fitch Ratings, which have warned of a potential downgrade of Puerto Rico general obligation and related credit to junk, have cited market access, as well as budget and economic performance as critical factors in retaining an investment grade rating.

The Puerto Rico legislature is also considering several measures aimed at bolstering the government's fiscal position, including a bill that would order government entities to transfer about $2.8 billion in deposits with island banks to the Government Development Bank.

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