Puerto Rico’s GO Bonds May Be Reduced to Junk by Fitch

Puerto Rico’s general-obligation debt, graded one step above junk level, may be cut by Fitch Ratings if the island commonwealth’s access to credit markets continues to be limited.

Fitch will decide by the end of June whether to lower its score on Puerto Rico bonds to noninvestment grade, Karen Krop, a New York-based analyst, said in a report yesterday.

“Continued lack of reasonable external market access would be considered a material reduction in financial flexibility and cause for a downgrade,” Krop said in the report.

The island’s debt is held by more than three quarters of mutual funds that invest in municipal bonds, according to Morningstar Inc. in Chicago, and a rating cut may lead many funds to sell some of those holdings. All three major rating companies grade the securities one step above junk, with a negative outlook. The commonwealth’s bonds have lost almost 16 percent this year, the most since at least 1999.

Puerto Rico bonds have been trading below investment-grade levels this year. A general-obligation security maturing in July 2041 traded yesterday with an average yield of about 7.9 percent, or 3.7 percentage points above an index of benchmark debt with similar maturities, data compiled by Bloomberg show. The yield reached almost 9.3 percent on Sept. 11, the highest level since the bonds were sold in March 2012.

Financing Needs

The territory has $1.46 billion of debt payments and financing needs for fiscal 2014, which ends in June, according to Fitch. While its Government Development Bank can provide liquidity, “doing so would leave the commonwealth with reduced remaining flexibility,” Krop said in the report.

Officials plan to sell as much as $1.2 billion of sales-tax revenue bonds by Dec. 31, although they have sufficient liquidity to hold off through June, David Chafey, the development bank’s chairman, has said.

“Several rating agencies have recognized the significant steps we have taken to address the country’s fiscal issues in the long term, including the implementation of a pension reform, unprecedented measures to strengthen our public corporations, and decisive actions to reduce the deficit,” Governor Alejandro Garcia Padilla, 42, said in a statement about the Fitch report. “We believe in our plans and will continue to work focused and determined until we  achieve our goal.”

Jose Pagan, interim president of the development bank, said in a statement that “our administration continues its focus on creating sustainable economic growth through job creation, making ongoing progress towards our goal of a structural budget balance by fiscal 2016, and strengthening our credit profile, market access and liquidity.”

To contact the reporters 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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