Yields on Puerto Rico Bonds Jump, Prices Plummet

After Puerto Rico's governor signed a law declaring a fiscal emergency, yields on the territory's junk bonds issued in March soared to their highest levels yet on Wednesday, reaching 9.541 percent in afternoon trading.

Yields move inversely to price, and the price on the debt also fell to a record low of 86.125 cents on the dollar in one large sale.

The yields remained high later in the day, hovering at 9.509 percent with a price of 86.375 cents on the dollar.

Soon after the law was signed, Standard & Poor's Ratings Services downgraded Puerto Rico Electric Power Authority's (PREPA) revenue bonds to BBB- from BBB and placed the rating on CreditWatch with negative implications.

PREPA, a self-funded utility enterprise, has $8.6 billion of power revenue bonds outstanding that are backed by the electric system's net revenues.

The ratings cut fueled fears that the power authority is headed for restructuring, said Robert Donahue, a managing director at Municipal Market Advisors.

"There is concern that it may have a contagion effect among other issuers in Puerto Rico. I think specifically people are concerned about general obligation bonds," said Donahue.

An agency restructuring may not have an impact on the territory's general obligation bonds, but there is a "perception by investors that Puerto Rico would not honor its other debts more broadly," Donahue said.

Governor Alejandro García Padilla signed a bill Tuesday night declaring a fiscal emergency and attempting to address the territory's recent credit downgrades through a fiscal management plan that includes finding savings in the public workforce.

"With this measure, the legal framework that will enable us to guarantee the continuity of governance in key areas of health, safety, education, social work and development is established," he said in a statement. "Thus, we adopted a plan to manage the consequences of degradation and establish structured credit management for compliance with the country's commitments without laying off employees or reduce working time."

Some public workers had resisted the law as it worked through the legislature over the last week, according to the Bond Buyer, but Padilla said that "the union leaders have also been key part in the passage of this legislation."

Yields on the bonds, which come with a rich 8 percent coupon, have been rising for a week as the law made its way through Puerto Rico's legislature.

In March, Puerto Rico brought $3.5 billion bonds to market, the largest municipal junk bond deal to market in U.S. history, in a bid to increase its liquidity.

Early in 2014, all three major credit rating agencies slashed Puerto Rico's credit score as the territory fell into deeper financial and liquidity problems. While the sale eased some pressures, both the $3.7 trillion municipal market and the federal government are keeping a close watch for further deterioration.

(Reporting by Lisa Lambert in Washington and Robin Respaut and Hilary Russ in New York; Editing by Bernard Orr)