SAN JUAN (Reuters) - Investors are losing interest in a proposed $2.9 billion bond deal that would provide a financial lifeline for Puerto Rico after three prominent legislators called for debt restructuring, according to three investor sources.
Potential investors are holding back support after talk of restructuring by majority lawmakers, according to one source close to the deal. Three other investor sources said the talk had rattled investors and could kill demand for a deal now scheduled for early May.
"Right now there is no deal," said the source close to the deal, who added it could be delayed further or even put off indefinitely.
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Puerto Rico is struggling with more than $70 billion in total debt and must overcome opposition from local lawmakers as well as demands from investors for extra security as it attempts to sell more debt.
The U.S. commonwealth had already delayed the bond deal from earlier this year, sources familiar with the matter previously told Reuters.
Meetings between government officials and investors are likely this week as expectations grow that Puerto Rico could undertake a wider debt restructuring than initially thought, the source close to the deal said.
“If the restructuring message keeps coming from high ranking officials, it can definitely impact the deal,” said a prominent financial industry executive and former government official who often advises potential investors.
Three Popular Democratic Party lawmakers announced last week would file legislation to amend the constitution to enable Puerto Rico's general obligation debt to be restructured.
The three lawmakers' amendment would have to be approved by a two-thirds majority in the legislature and then by a majority of voters in a referendum.
Their announcement came two days after the legislature made the proposed bond deal viable by approving a clause to adjust a petroleum tax hike.
The proceeds from the bond sale would go to repay a loan made by the Government Development Bank (GDB) to a highway agency, strengthening the finances of the government's lender of last resort.
Last Thursday, Senate President Eduardo Bhatia announced his intention to use this year's budget process to restructure the commonwealth government, which would involve spending cuts, increased tax revenue and negotiating to lower the central government's debt burden by lengthening maturities or lowering interest rates.
"We have to reduce spending, we have to renegotiate the debt and we have to increase revenue," Bhatia said. “These are the three exercises we are going to be working with over the next three months.”
“We have to restructure part of the debt, but not paying it is not an option. There has to be a balance,” he added.
GDB Investors Relations Director Todd Hagerman said Bhatia's comments and the House measure to amend the "have raised concerns among investors" but reiterated the administration's stance of honoring its commitment to holders of the commonwealth of Puerto Rico's debt.
"The constitution and the commonwealth have a very long history of protecting the rights, guarantees and the backstop related to bond investors," Hagerman said.
Maria de Lourdes Martinez, a spokeswoman for Senate President Bhatia, told Reuters Sunday that Bhatia "has been very vocal and persistent in saying that Puerto Rico and its leaders need to work on a reasonable arrangement with our bondholders that will alleviate the current fiscal crunch."
(Reporting by a contributor in San Juan; Editing by Megan Davies, Jane Baird and Jonathan Oatis)