Puerto Rico’s Debt Plan Seen Stinging Banks, Moody’s Says

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Puerto Rico’s plan to restructure its public debt would probably set off “messy and protracted” litigation and potentially broader financial turmoil that harms the island’s banks, Moody’s Investors Service said.

The commonwealth’s restructuring proposal, unveiled last week, could lead be credit negative for lenders including Banco Santander Puerto Rico, Banco Popular de Puerto Rico and FirstBank Puerto Rico, the ratings company said Monday in a report.

“The banks’ core deposit flows have remained relatively steady in recent periods despite the island’s economic and fiscal challenges,” according to the report. “Nonetheless, messy, tumultuous or protracted debt-restructuring negotiations risk squeezing banks’ funding positions.”

Puerto Rico and its agencies, looking to reduce a $72 billion debt load, said last week the government will only have $5 billion to repay $18 billion of principal and interest due in the next five years. Officials will propose to investors in a few weeks changes to existing bonds, including potentially delaying debt-service payments.

Puerto Rico racked up debt by borrowing to fix budget deficits. The island’s economy has been in decline since 2006 and is projected to contract by 1.2 percent in the budget year ending June 30. Its population has shrunk by 7 percent in the past decade as people look for work on the U.S. mainland. Puerto Rico’s 11.9 percent unemployment rate is more than double the U.S. average.

Capital Positions

While the commonwealth “lacks an obvious engine of economic recovery,” its banks have strong capital positions that would help defend against declines in asset quality, Moody’s said. Banco Santander Puerto Rico on June 30 reported a Tier-1 capital ratio of 25.7 percent, while FirstBank Puerto Rico’s was 16.4 percent and Banco Popular de Puerto Rico’s was 15.9 percent.

The capital “will help mitigate their losses that come from direct exposure to the public sector, but we think a protracted restructuring process that creates uncertainty in the market could also affect their funding position,” Joseph Pucella, a Moody’s analyst, said in a phone interview. “The banks’ performance will ultimately be a reflection of the underlying economy, and that’s really what we’re focused on.”

Spokeswomen for the three Puerto Rican banks didn’t immediately respond to e-mails seeking comment.

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