Tuesday, February 4, 2014

After Long Wait, Standard & Poor's Lowers Ratings for Commonwealth of Puerto Rico's Debt

Standard & Poor's Ratings Services has lowered its rating on the Commonwealth of Puerto Rico's general obligation (GO) debt to 'BB+' from 'BBB-'. At the same time, S&P downgraded Commonwealth appropriation secured debt and Employee Retirement System (ERS) debt to 'BB'. All ratings remain on CreditWatch with negative implications.
Standard & Poor believes there is a "reduced capacity to access liquidity from the 
Government Development Bank (GDB) of Puerto Rico." In a related action, the GDB was downgraded to 'BB', and the rating remains on CreditWatch with 
negative implications. 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.

In addition, Standard & Poor's Ratings Services 
lowered its long-term rating and underlying rating to 'BB+' from 'BBB-' 
on the University of Puerto Rico's  (UPR) existing university system revenue 
bonds. S&P also lowered the standalone credit profile on the university to 'bb+' from 
'bbb-'. The rating remains on CreditWatch with negative implications.  

"Per our government related entities (GRE) criteria, a rating change on Puerto 
Rico (BB+/Watch Negative) would result in a rating change to the UPR given the 
high likelihood of extraordinary support," said Standard & Poor's credit 
analyst Bianca Gaytan-Burrell.
The following paragraphs are quoted from Standard & Poor's article explaining the downgrade to investors:
"That the rating is not lower is due to the progress the current administration  has made in reducing operating deficits, 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. 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. We also note the sustained commitment through a range of financial and economic cycles to funding debt obligations and providing what we view as strong bondholder security provisions."
"We have also lowered various ratings on the Puerto Rico Highways and 
Transportation Authority (HTA) to the same rating as the Commonwealth GO at 
'BB+', and kept it on CreditWatch with negative implications, to reflect the 
potential diversion of gas tax-derived revenue to pay GO debt service under 
the Puerto Rico constitution. We have not taken a rating action on sales 
tax-secured debt of the Puerto Rico Sales Tax Financing Corp. (COFINA), but 
have retained our negative outlook on our COFINA ratings reflecting our view 
of the economic outlook and that COFINA sales tax is not subject to the prior 
diversion of revenue for GO debt service payments."
García Padilla Responds
Governor García Padilla said in a press conference that his administration will maintain an aggressive plan for job creation and economic growth, despite Standard & Poor's downgrade. The administration will immediately introduce new legislation to reduce the current fiscal year's deficit and work to accelerate the preparation of the budget for fiscal year 2014-2015. The new budget will, according to García Padilla, be the first in decades to close the government's structural deficit.

The decision to downgrade the debt below investment grade is the result is the end result of "fiscally irresponsible decisions" taken on behalf of the Island's credit," said the governor. "Decades of fiscal irresponsibility are not reverted in 12 months. Mi administration may not be responsible for the downgrade, but I assume the responsibility of taking the country out of it."

The governor cited the reform of public employees' pension systems, the approval of a more austere budget with higher tax revenues and the creation of over 25,000 jobs as some of the actions taken by the current administration to strengthen the government's finances.
Also, he announced that his fiscal team continues to prepare a new emission of government bonds in the coming weeks.


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