Puerto Rico Faces Cut to Junk by Moody’s as Economy Slips
Puerto Rico’s general-obligation bond rating may be lowered to junk if the commonwealth’s finances continue to deteriorate and it isn’t able to access capital markets soon, Moody’s Investors Service said.
Moody’s said its decision to put the island’s credit under review affects $52 billion of rated debt, including sales-tax bonds. Puerto Rico’s securities are held by more than three-quarters of mutual funds that invest in municipal bonds, according to Morningstar Inc. (MORN) in Chicago. A rating cut might lead some funds to reduce holdings.
Moody’s may downgrade the U.S. territory because of “weakening liquidity, increasing reliance on external short-term debt and constrained market access, within the context of a weakened and now sluggish economy,” Lisa Heller, an analyst, said in a report yesterday.
Those developments worsen the strain of “the commonwealth’s very high debt load and pension obligations, as well as its chronic budget deficits,” Moody’s said.
This isn’t the island’s first threat of a cut to speculative grade. Fitch Ratings last month warned that the self-governing commonwealth would be cut to junk by June 30 if it’s unable to borrow through the capital markets. Moody’s review period extends for as long as 90 days, said David Jacobson, a spokesman for the New York-based rating company.
The island wants to sell as much as $1.2 billion of sales-tax bonds, known as Cofina debt, by year-end to help balance budgets. A surge in the territory’s yields has blocked access to capital markets.
“The commonwealth has not yet made a determination on the timing of a Cofina issuance,” Jose Pagan, interim president of Puerto Rico’s Government Development Bank, said in a statement. “We have the flexibility necessary to make adjustments, as appropriate, to account for changing market conditions and do not need to go to the market” in the fiscal year through June, he said.
The three major rating companies grade the securities one step above non-investment level.
An index of Puerto Rico’s economic activity fell in October compared with the same period in 2012, according to a report this week from the Government Development Bank. The GDB handles capital-market transactions for the territory. It marked the 11th straight month of year-over-year declines.
In a sign of improvement, the index rose on a month-over-month basis in September and October, the first consecutive gains by that measure since 2012.
Some indicators “may point to the start of economic stabilization,” Heller said. “Retail sales and auto sales are reported to be up, and the labor force continues to grow.”
Revenue collections for the five months through November are $79 million above budgeted estimates, Treasury Secretary Melba Acosta said today. They’re also 12.4 percent higher than the same period of 2012 after lawmakers boosted corporate taxes to help balance the budget.
Moody’s “identified that economic indicators may point to the start of economic stabilization,” Acosta and Government Development Bank Chairman David H. Chafey said in a statement.
“We are further encouraged that Moody’s recognized our growing labor force, our economic plan focused on job creation, and the strength of fiscal 2014 revenue growth in the general fund through October,” they said.
Puerto Rico general obligations maturing in July 2041 traded today with a yield as high as 8.99 percent and yesterday with an average yield of 9.16 percent, the highest since September, data compiled by Bloomberg show. Yesterday’s average extra yield of about 5 percentage points was the most since the bonds were sold in March last year.
The commonwealth’s bonds have lost 18.5 percent this year, the most since at least 1999, and more than seven times the decline in the broader muni market, Standard & Poor’s data show.
Puerto Rico tapped the GDB to repay a $400 million short-term loan with Barclays Plc that was due Dec. 1, according to two people familiar with the transaction. Commonwealth officials didn’t ask Barclays to extend the loan’s maturity, said the people, who requested anonymity because the loan is private.
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