S&P downgrades Puerto Rico to junk status
By Vivianne Rodrigues in New York From Financial Times
Standard & Poor’s has stripped Puerto Rico of its investment grade status, saying the debt-laden island is suffering from liquidity constraints because of its limited access to capital markets.
The ratings agency first warned that it was considering downgrading Puerto Rico to junk last month, but was moved to act by the commonwealth’s reduced capacity to access liquidity from the island’s Government Development Bank.
It is the first of the three big rating agencies to remove Puerto Rico’s investment grade status, striking a blow to the aggressive plan by governor Alejandro Padilla to rein in costs and balance the island’s budget.
Puerto Rico’s treasury secretary, Melba Acosta Febo, and GDB chairman, David Chafey, said they were disappointed over S&P’s decision. “We remain committed to the implementation of our fiscal and economic development plans,” they said in a joint statement.
S&P lowered the rating on Puerto Rico’s general obligations by one notch to BB+ from BBB-. Puerto Rico remains on its “CreditWatch” list, with negative implications, suggesting the potential for another downgrade in the coming months.
“The commonwealth’s access to liquidity either through GDB or other means will remain constrained in the medium term, even in the event of a potential issuance of debt planned next month. We believe that these liquidity constraints do not warrant an investment-grade rating,” S&P said in a statement.
Puerto Rico bonds have been under pressure for several months as worries over the island’s ability to keep servicing its $70bn debt mounted.
The territory suspended most of its bond programme in 2013 after yields on its debt soared. On Tuesday, average yields on Puerto Rico general obligation bonds maturing in 2036 jumped nearly 50 basis points to 10.16 per cent after S&P’s move, according to Thomson Reuters.
Puerto Rico is now considering a return to capital markets as early as the end of this month but the downgrade could both increase its borrowing costs and limit demand for the new securities because some large money managers cannot buy debt rated below investment grade.
Puerto Rico bonds have been a mainstay of municipal bond portfolios given the island’s triple-tax exempt status. About 70 per cent of US municipal mutual funds hold Puerto Rico securities, according to Morningstar.
“The planned near-term sale of sizeable commonwealth tax-backed debt will refinance existing GDB loans into long term debt at potentially high interest costs, adding to an already high debt service burden,” S&P said.
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Moody’s downgrades Puerto Rico to junk
Moody’s Investors Service on Friday became the second rating agency this week to cut Puerto Rico’s credit rating to junk, citing concern about the cash-strapped US territory’s weak economy and its ability to borrow.
Reaction in the $3.7 trillion municipal bond market was somewhat muted as the move was widely expected, though a few wild odd-lot trades, while tiny, indicated growing concern about the Caribbean island’s ability to meet its obligations.
Moody’s said it now rates the commonwealth’s general obligation bonds at Ba2, two notches below investment grade and one step deeper into junk territory than Standard & Poor’s, which cut the Caribbean island’s rating to junk on Tuesday.
With some $70bn of tax-free debt – nearly four times the $18bn owed by bankrupt Detroit – Puerto Rico has long been mired in recession and has for months been under threat of a ratings downgrade by all three US credit rating agencies.
Moody’s praised the government’s recent attempts to cut spending, reform its pension system and boost growth, but said they are not enough.
“While some economic indicators point to a preliminary stabilisation, we do not see evidence of economic growth sufficient to reverse the commonwealth’s negative financial trends,” Moody’s said.
In the municipal bond market, investors said they were not surprised by the downgrade. But a spike in the yields in a few odd-lot trades indicated that some bondholders were demanding greater compensation due to a perception of increased risk.
The yield on a Puerto Rico tax-exempt public improvement refunding general obligation bond maturing on July 1 topped 28.75 per cent, compared with 5.48 per cent on its most recent previous trading day in late January.
A similar bond maturing this summer carried a yield of over 34 per cent in one late trade on Friday, though even at that rate, it was still priced at about 90 cents on the dollar.
Fear of an imminent default, as measured by Puerto Rico’s one-year credit default swap, remained high.
As of Friday afternoon, it cost more than $22,000 to insure $100,000 of Puerto Rico bonds against default for one year. That was more than it cost to buy five- or 10-year insurance.
Emily Raimes, Moody’s lead analyst on Puerto Rico, told Reuters that the commonwealth’s failure to sell bonds late last year or so far this year had heightened concerns about its liquidity position.
The government plans to sell up to $2bn in debt this month, its first foray into the bond market since August.
The downgrade could also cost the commonwealth more than $1bn in penalties and other costs tied to variable rate demand obligations and other securities, Ms Raimes said.
Puerto Rico Governor Alejandro García Padilla said earlier this week he would seek to renegotiate swaps agreements and other loans that will require accelerated payments.
In a joint statement, Treasury Secretary Melba Acosta Febo and the chairman of the Government Development Bank for Puerto Rico, David Chafey, said they “strongly disagree” with Moody’s decision and were “confident” about meeting obligations until the end of the fiscal year.
Mr Padilla also criticised the action, citing the recent passage of sweeping pension reforms and other measures that Moody’s called for last year.
“It’s evident that Moody’s Investors Service has abandoned its fundamental role of providing an analysis without prejudice to its clients and has become locked in a game of appearances with its competitors,” he said.
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