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Puerto Rico Has Biggest Loss Since 2008 as Pension Changes Loom

Municipal debt sold in Puerto Rico fell 1.44 percent on March 22, the biggest one-day loss in almost five years as the commonwealth deals with deficits.

A Standard & Poor’s index of debt sold by Puerto Rico and its issuers, widely held because it is tax-exempt in all U.S. states, lost 1.44 percent, the most since Sept. 18, 2008, said J.R. Rieger, vice president of fixed-income indexes at S&P. A measure of the broader $3.7 trillion municipal-bond market, the S&P National AMT-Free Municipal Bond Index, lost 0.07 percent the same day.

“Investors are beginning to get very worried about the actual actions necessary to right the economic ship,” Rieger said in a telephone interview.

Governor Alejandro Garcia Padilla, 41, of the Popular Democratic Party, took office in January and is working to keep Puerto Rico’s investment-grade rating. All three rating companies grade the commonwealth one step above junk with a negative outlook, meaning it could be downgraded soon. Its projected deficit for the fiscal year ending June 30 has almost doubled to $2.2 billion, according to Moody’s Investors Service.

Garcia Padilla last month announced pension changes to bolster the island’s largest retirement system, which is 6.8 percent funded and will run out of assets in 2014.

A Puerto Rico Aqueduct & Sewer Authority bond due July 2042 traded today as low as 88.14 cents on the dollar, the lowest ever and down from about 93 cents on March 21, data compiled by Bloomberg show.

Meeting Investors

Even with last week’s losses, debt sold in the commonwealth is earning more this year than the broader muni market. It has gained 0.37 percent in 2013, according to the S&P index, beating the 0.22 percent of the S&P National AMT-Free Municipal index.

Puerto Rico’s debt lost value the day that Treasurer Melba Acosta and Javier Ferrer, president of the Government Development Bank, the island’s fiscal agent, met investors in New York.

The governor and legislative leaders have pledged to pass laws by early April that will boost the retirement age, increase employee contributions, and require the commonwealth to direct as much as $200 million annually to the pension fund, Ferrer said. Otherwise, Puerto Rico would have had to pay about $900 million a year from its general fund to retirees, he said.

“This is not a short-term solution,” Ferrer said in a telephone interview last week. “This is a long-term solution to a very serious problem in Puerto Rico.”

-- Editors: Stephen Merelman, Pete Young

To contact the reporter on this story: Michelle Kaske in New York at mkaske@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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