Puerto Rico Rating Downgraded to Junk Status By Standard and Poor’s

Above: San Juan (CJ Photo)

By the Caribbean Journal staff

Standard & Poor’s has lowered its rating on the government of Puerto Rico’s general obligation debt to junk status, the New York-based ratings firm announced Tuesday.

The firm lowered Puerto Rico’s debt to “BB+” from “BBB-“, also downgrading Puerto Rico’s appropriation secured debt and employee retirement system debt to “BB.” “BB+” is the highest level in junk territory.

All of the ratings remain on S&P’s “CreditWatch” with negative implications.

The move is the latest unfortunate, if not unexpected, news for a territory that has been struggling with its finances for some time.

“The determination of S&P is the result of irresponsible decisions that were taken for decades on behalf of the country,” Governor Alejandro Garcia Padilla said in a statement. “Despite the significant progress we have made, it is certainly not enough and there is still more to do.”

The downgrade followed what Standard & Poor’s said was its evaluation of liquidity for Puerto Rico, including “what we believe is a reduced capacity to access liquidity from the Government Development Bank (GDB) of Puerto Rico.”

“We also believe that the Commonwealth’s access to liquidity either through GDB or other means will remain constrained in the medium term, even in the event of a potential issuance of debt planned next month. We believe that these liquidity constraints do not warrant an investment-grade rating,” the firm said.

Standard & Poor’s said that the rating would have been lower if not for the “progress the current administration has made in reducing operating, and what we view as recent success with reform of the public employee and teacher pension systems, which had been elusive in recent years.”

“We view the reform as significant and could contribute to a sustainable path to fiscal stability,” the firm said. “We view the current administration’s recently announced intent to further reduce appropriations in fiscal 2014 by $170 million and budget for balanced operations in fiscal 2015 as potentially leading to credit improvement in the long run, but subject to near-term implementation risk that could lead to further liquidity pressure to the extent deficits continued.”

Standard & Poor’s said its rating was based on factors including Puerto Rico’s strong ties to the mainland US economy, structural deficits in Puerto Rico’s general fund for more than a decade; “weak economic trends that began in 2007”; its high level of debt and retirement liabilities and a government framework that “constitutionally places repayment of general obligation debt ahead of other expenses and “broad legal authority to adjust revenues and expenditures,” among others.

S&P said Puerto Rico had contingent liquidity risks totaling $940 million in the event of a downgrade.

That number includes $39 million of additional GO interest rate swap collateral posting, $575 million of HTA debt acceleration, and $69 million of additional swap collateral posting.”

“We understand that the GDB is currently negotiating to have certain debt holders waive acceleration provisions and arranging for new multi-year external bank credit lines that could mitigate near-term liquidity risks,” the firm said. “The $940 million total includes only the current additional capital requirements in the event of a one-notch downgrade.”

“This administration will maintain its aggressive plan to create jobs and economic development to shore up the country,” Garcia said.