SAN JUAN, Puerto Rico – Puerto Rico’s governor signed a bill Tuesday authorizing the sale of up to $3.5 billion in general obligation bonds after the U.S. territory’s credit rating was recently downgraded to junk status.
The move comes as the island prepares to re-enter the bond market to help pay off $70 billion in public debt, with Barclays, Morgan Stanley and RBC Capital Markets handling the bond sale. Puerto Rico last issued such bonds in 2012.
U.S. investors had been closely monitoring the bill, which allows them to sue the island’s government if needed in New York courts. An earlier version of the bill would have allowed investors to sue Puerto Rico in any U.S. court.
Gov. Alejandro Garcia Padilla said the measure is needed to strengthen Puerto Rico’s economy as the island of 3.7 million people enters its eighth year in recession and battles a 15.4 per cent unemployment rate, the highest compared with any U.S. state.
“This administration continues taking the necessary steps to strengthen Puerto Rico’s fiscal situation,” said Garcia, who has already imposed new taxes and made changes to crumbling public pension systems, among other things.
Treasury Secretary Melba Acosta said the money will be used mostly to repay and refinance existing debt, as well as strengthen the liquidity of Puerto Rico’s Government Development Bank, which oversees the island’s debt transactions.
The measure notes that the bank also had increased its number of loans to public corporations including the water and sewer authority without counting on a repayment source.
The island’s House of Representatives narrowly approved the measure late Monday in a 27-23 vote following several hours of debate, with some legislators expressing concern that Puerto Rico could lose its sovereignty by allowing investors to sue in U.S. court.
At one point, legislators requested the presence of the island’s justice secretary to help answer their questions concerning some of the bill’s language.
Puerto Rico economist Martha Quinones said a better option would have been to sell the debt to the Federal Reserve and obtain a lower interest rate. She said issuing up to $3.5 billion in bonds benefits high-risk investors but means the government has less money for services, public works and other things.
“The problem is that many investors are going to make money off this … but the ultimate losers are the people,” she said in a phone interview.
Puerto Rico’s bonds have been popular with U.S. investors because they are exempt from federal, state and local taxes, and its debt is held by roughly 70 per cent of U.S. municipal mutual funds, according to the investment research firm Morningstar.
Standard & Poor’s downgraded Puerto Rico’s credit one notch last month, while Moody’s Investors Service and Fitch Ratings lowered it by two notches.