Yields on some Puerto Rico bonds fell to a two-month low as investors said yesterday’s cut to junk status spurred buyers who had been delaying purchases in anticipation of a planned debt offer from the commonwealth.
Standard & Poor’s lowered Puerto Rico general obligations one step to BB+, the highest speculative-grade level, citing the U.S. territory’s limited ability to raise money in the capital markets. The move may be spurring buying from those who were waiting for the island to fall to junk before putting cash to work, said Bill Delahunty, director of municipal research in Boston at Eaton Vance Management.
Puerto Rico general obligations maturing July 2041 traded today with an average yield of 8.26 percent, the lowest since Nov. 25 and down from 8.35 percent yesterday, data compiled by Bloomberg show. The securities yielded about 5 percent a year ago. Debt due in 2034 and 2039 also gained today.
“There could be a bit of a relief because folks may not have wanted to buy a bond prior to the downgrade,” said Delahunty, whose firm oversees about $25 billion of local debt. With the S&P cut, “the overhang is removed.”
Puerto Rico and its agencies have $70 billion of debt, about $16 billion of which is backed by Puerto Rico’s full faith and credit, according to the commonwealth’s Government Development Bank, which works on its debt transactions. In a 2013 Moody’s Investors Service ranking of state debt loads, only California and New York had more gross tax-supported debt.
About 70 percent of U.S. municipal mutual funds own Puerto Rico securities, which are tax-exempt nationwide, according to Morningstar Inc.
Commonwealth securities have traded at speculative-grade levels since at least September, luring buyers such as hedge funds and investors in distressed assets. Debt sold by Puerto Rico and its agencies lost 20.5 percent in 2013, the biggest drop since at least 1999 and about eight times more than the loss for the $3.7 trillion municipal market, S&P data show.
Some Puerto Rico bonds lost value today. Average yields on debt backed by sales-tax revenue and maturing in August 2042 rose to 8.34 percent, the highest since Jan. 15. The bonds, known as Cofinas, weren’t affected by yesterday’s downgrade.
Officials have struggled to revive the Caribbean getaway’s shrinking economy, and plan to sell bonds as soon as this month to raise funds and plug deficits.
S&P warned that it may lower Puerto Rico’s rating further if it is unable to raise funding, David Hitchcock, an S&P analyst, wrote in a report released yesterday.
“It’s really going to come down to this deal,” Peter Hayes, head of munis at New York-based BlackRock Inc., which oversees about $108 billion in local debt, said about Puerto Rico’s plan to sell debt as soon as this month. “Can they get it done and for how much?”
Puerto Rico will address its immediate cash-flow needs if it is able to issue debt in the next few weeks, Hayes and Delahunty said.
The downgrade to junk means that Puerto Rico will need to pay $940 million in debt-acceleration payments and swap collateral postings, according to Hitchcock. Commonwealth officials are negotiating to change those requirements, he wrote.
“We are confident that we have the liquidity on hand to satisfy all liquidity needs until the end of the fiscal year, including any cash needs resulting from” the S&P decision, Government Development Bank Chairman David Chafey and Treasury Secretary Melba Acosta said in a statement yesterday.
At least one other rating firm may lower the island in the next 30 to 45 days, Hayes said.
Moody’s and Fitch Ratings give Puerto Rico the lowest investment grade. Moody’s on Dec. 11 threatened to cut Puerto Rico to junk within 90 days if it is unable to access capital markets. Fitch may lower it to junk by June 30, the firm said on Nov. 14.
The federal government hasn’t offered additional funds and Puerto Rico hasn’t requested such aid, Acosta said Jan. 24 in an interview on CNBC.
“The federal government has offered technical assistance, and that’s what we’re getting,” Acosta said.
The U.S. Treasury isn’t considering financial assistance for the commonwealth, said a spokeswoman. The administration is working with Puerto Rico officials to ensure they’re taking advantage of existing federal resources, she said.
As Puerto Rico’s bond yields have soared in the past six months, the cost to protect its debt has risen as well.
It costs the annual equivalent of about $760,000 to hedge $10 million of Puerto Rico bonds for five years through credit-default swaps, close to the highest since at least July, according to data provider CMA, which is owned by McGraw Hill Financial Inc. and compiles prices quoted by dealers in the privately negotiated market.
In comparison, the cost for Illinois, the lowest-rated U.S. state, is $158,000.
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