Investment funds demand Puerto Rico pay bondholders : Business

NEW YORK • U.S. fund managers and major Puerto Rico investors OppenheimerFunds and Franklin Advisors on Thursday demanded that funds be made available for payment by the island’s Public Finance Corp (PFC), warning that its failure to make a bondholder payment due Aug. 1 violated Puerto Rican law.

Puerto Rico defaulted on debt of its PFC bonds on Monday by paying only a fraction of what was due, showing the depth of the island’s economic and cashflow problems and potentially opening the door to broader defaults and litigation from bondholders.

“This missed debt service payment will impact individual holders of PFC Bonds, investors in the mutual funds of OppenheimerFunds and Franklin,” the funds said in a letter dated Aug. 5 addressed to the PFC.

OppenheimerFunds is the largest holder of Puerto Rico debt among U.S. municipal bond funds with about $4.5 billion exposure, and Franklin the second largest with about $2.3 billion, according to recent data from Morningstar.

The funds said in the letter that the failure to pay was “unprecedented” and “violates the requirements of Puerto Rican law.”

The funds demanded that the island’s treasury secretary advance funds to PFC, saying that the legislative acts authorizing the notes that secure the bonds require Puerto Rico to honor payments.

“The Treasury Secretary must now exercise that power and advance funds to PFC so that it may make the August Payment,” they said.

The funds added that PFC must take all actions necessary to collect on the notes, including compelling Puerto Rico’s Government Development Bank and/or its Treasury Secretary to transfer funds to the Trustee for purposes of making the August payment.

Documents the PFC had previously filed say bondholders may not start a lawsuit unless they have filed notice of a request to cure a breach, and that the commonwealth be given reasonable time to respond.

A spokeswoman for the commonwealth declined immediate comment.

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