Puerto Rico Cut Further Into Junk by S&P on New Debt Law

Puerto Rico was downgraded further into speculative grade by Standard & Poor’s after a new law granted some public corporations the ability to restructure debt.

S&P lowered its rating on the commonwealth’s general obligations by one level to BB from BB+, according to a report released today. The action follows similar downgrades this month by Moody’s Investors Service and Fitch Ratings.

Puerto Rico and its agencies have $73 billion of debt, according to commonwealth documents. The territory has $14 billion of general obligations, according to Moody’s. Governor Alejandro Garcia Padilla signed into law June 28 a measure that allows some public agencies, such as the Puerto Rico Electric Power Authority, to negotiate with bondholders to lower their debt loads.

The new law shows “the mounting economic and fiscal challenges for the commonwealth,” analysts led by David Hitchcock said in the report. “Enactment of the legislation itself signals a potential shift in the commonwealth’s historically strong willingness to continue to meet its obligations to bondholders.”

‘Simply Incorrect’

The suggestion that Puerto Rico may be less willing to honor its commitments “is simply incorrect,” Government Development Bank Chairman David Chafey Jr. and the island’s treasury secretary, Melba Acosta Febo, said in a statement.

The new law, they said, is intended to give public corporations “the opportunity to become self-sustaining businesses that no longer require support” from the commonwealth’s general fund, which pays for most core operations, or the Government Development Bank, which handles Puerto Rico’s debt sales.

The bank will conduct an investor webcast at 2:30 p.m. on July 17 to update bondholders on the commonwealth’s fiscal and economic plans, according to an e-mailed statement.

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