Feb 6 (Reuters) - Puerto Rico general obligation bonds traded higher on Thursday in the wake of a report of a tentative deal involving debt that the U.S. commonwealth's federally created financial oversight board has been trying to void.
More than $6 billion of bonds Puerto Rico issued in 2012 and 2014 had been targeted by the board for allegedly being issued in violation of a debt limit in the Caribbean island's constitution. As a result, owners of those bonds were assigned low recoveries in a debt restructuring plan the board submitted in September to a U.S. District Court hearing Puerto Rico's bankruptcy case.
The Wall Street Journal reported on Wednesday that competing groups of bondholders and the board reached an initial compromise that would settle a dispute over the 2012 and 2014 bonds.
A tentative deal would increase recoveries for the bonds and remove the need to litigate their validity, according to a person familiar with the matter. Representatives for the board and for various bondholders declined to comment.
Bonds issued in 2014 that had been trading at 69 cents on the dollar in late January sold at 72.63 cents on Thursday. Other bonds issued in 2012 with a 2041 maturity traded at 76 cents, up from the 72-cent range last week, according to Municipal Market Data (MMD).
Daniel Berger, MMD's senior market strategist, said the perception that bondholders would get higher recoveries was driving prices higher.
Puerto Rico commenced a form of municipal bankruptcy in 2017 to restructure about $120 billion of debt and pension obligations. The board's so-called plan of adjustment for the government's core debt offered recoveries of 45% for the 2012 bonds and 35% for the 2014 bonds with hold-out bondholders facing the risk of receiving nothing if the bonds were ultimately invalidated in federal court.
The recovery for nondisputed GO bonds issued before 2012 was pegged at 64%.
At a federal court hearing last week, the board's attorney hinted that movement in mediation with creditors could be announced this month.
(Reporting by Karen Pierog in Chicago Additional reporting by Luis Valentin Ortiz in San Juan Editing by Matthew Lewis)