Puerto Rico’s general-obligation bonds are poised to be cut to junk within the next month, according to UBS AG.
“Given the myriad obstacles facing Puerto Rico, we believe that at least one rating agency will take such an action within the next 30 days,” analysts Thomas McLoughlin and Kristin Stephens at UBS Wealth Management in New York wrote in a report dated yesterday.
Puerto Rico, rated one step above speculative grade with a negative outlook by Moody’s Investors Service, Standard & Poor’s and Fitch Ratings, has been struggling to expand its economy since 2006. Moody’s warned Dec. 11 that it may downgrade the island within 90 days if it’s unable to access capital markets. S&P and Fitch have issued similar warnings.
The probability of the three biggest ratings companies lowering the commonwealth to junk by the end of the fiscal year, or June 30, “is very high,” the analysts wrote.
About 70 percent of U.S. municipal mutual funds hold Puerto Rico securities, which are tax-exempt nationwide, according to Morningstar Inc.
A downgrade to junk may limit demand for Puerto Rico debt because some money managers can’t buy securities rated below investment grade. The commonwealth and its government agencies have $70 billion of debt, according to the Government Development Bank, which works on Puerto Rico’s debt transactions.
Puerto Rico officials declined to comment on the UBS report, said Alix Anfang, a spokeswoman in New York for the GDB. Commonwealth officials met with the major credit-rating firms this week to discuss the island’s finances, she said.
The commonwealth plans to sell long-term debt in February to balance budgets after soaring interest rates last year halted issuance of as much as $1.2 billion of sales-tax bonds.
An index that tracks Puerto Rico’s economic activity has contracted in six of the last seven fiscal years, according to the Government Development Bank. The island’s 15.4 percent December jobless rate is higher than in any U.S. state.
Investors have been valuing Puerto Rico bonds at junk levels since July, on concern that the commonwealth will be unable to repay its obligations on time and in full.
Puerto Rico general obligations maturing July 2041 traded today with an average yield of 8.51 percent, 4.68 percentage points more than benchmark munis with similar maturity, data compiled by Bloomberg show.
High-yield, high-risk bonds are rated below Baa3 by Moody’s and lower than BBB- at S&P.