Fitch Ratings late Wednesday assigned its first-ever rating to Puerto Rico general obligation bonds, giving them a BBB-plus. The outlook for the $9.2 billion of GOs is stable. The bonds now have a rating from all three major rating agencies.
The rating announcement comes as Puerto Rico plans to sell by June 30 its first new-money GO issuance since September 2008. Officials are also working on GO refinancings set to price in February.
In a telephone interview, Gov. Luis Fortuño and Carlos Garcia, president of the Government Development Bank for Puerto Rico, said the BBB-plus rating reflects the layoffs, spending cuts, and tax increases the administration has made to help reduce the commonwealth’s structural deficits and its dependence on borrowing to meet operating expenses.
Standard & Poor’s in November changed Puerto Rico’s outlook to positive from stable. The rating is BBB-minus. Due to an unfunded pension liability, Moody’s Investors Service in August revised its credit outlook to negative after it recalibrated the rating to A3 from Baa3 in April.
“After two very difficult years where we actually were able to put our house in order from the fiscal point of view, it certainly has been paying off,” Fortuño said. “The rating agencies are validating 100% of what we have been doing, not just on the fiscal side but on the economic-development strategies side as well. And certainly, we are extremely pleased with that.”
Fortuño and Garcia spoke with The Bond Buyer between meetings in Madrid with potential investors. The two arrived on Tuesday to meet with clients from Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA to promote Puerto Rico’s infrastructure investment opportunities.
Having an additional rating may help the commonwealth as it prepares to restructure $350 million of GO debt beginning in February and also sell new-money GO debt in the first half of 2011. Garcia declined to specify how much GO borrowing capacity the administration will seek from the Legislature. The GDB is still tallying up the amount of Puerto Rico’s infrastructure spending needs for this year, he said.
For the past two years, the commonwealth has been relying on its sales tax credit, called COFINA by its Spanish acronym, to access the municipal market. The senior bonds carry double-A ratings from the three rating agencies.
The GDB last year decided that it would like Fitch to weigh in on the commonwealth’s GOs. Puerto Rico officials and Fitch then began a dialogue with the goal of obtaining a third credit rating.
“We were anticipating that we wanted to have more coverage in terms of our rating,” Garcia said. “And I think that it has been a good idea because given the difficulties of the market, it is a good validation and to also have three ratings for our credit.”
Fitch already rates other Puerto Rico credits such as the COFINA bonds, the Puerto Rico Aqueduct and Sewer Authority, and the Puerto Rico Electric Power Authority. In October, Fitch affirmed its BBB-plus rating on PRASA’s commonwealth-backed debt, which at the time was an indication of how the rating agency viewed Puerto Rico.
Fitch’s BBB-plus rating takes into account Puerto Rico’s history of weak financial operations, low pension funding rate of 9.8%, and high debt levels, according to a Fitch report. It also reflects the fiscal reconstruction plan that the administration put in place to rein in spending and generate sufficient revenue to meet operating costs.
“They have taken many steps in their fiscal and economic construction plan and it gives them credibility going forward that they can continue to implement the kind of changes that they need to ultimately get to structural balance and stimulate the economy and see it start to grow again,” said Fitch analyst Karen Krop. “They’re not there yet, but they’re getting there. And I think that the rating reflects the idea that there’s a lot in place and now we need to see if it has the effect that was intended.”
Krop said Fitch will continue to monitor how the commonwealth addresses its $17 billion unfunded pension liability and whether the governor’s tax reform initiative will help the island’s economy, which has been in a recession since 2006. At the same time, the administration aims to eliminate budget deficits.
Garcia said the fiscal 2012 budget plan may include a “small amount” of one-time revenues.
“We’re anticipating that we will have either a balanced budget or a small amount that will have to be provided from other sources,” Garcia said.
The governor plans to release his fiscal 2012 budget proposal in early April. He is working with the Legislature to pass a tax reform measure that would cut corporate taxes to 30% from 41% and reduce the average income tax rate by 49% by fiscal 2016. Fortuño said the initiative could pass within a week to 10 days.
Officials expect to absorb the tax cuts by eliminating tax deductions and capturing revenue from a temporary excise tax that began Jan. 1. Fitch believes that there is a risk that the initiative may not generate enough revenue to make up for the tax cuts.
“They’ve built a lot of credibility by implementing other reforms prior to tax reform, but there is a risk that it doesn’t perform,” Krop said. “I think it’s not a big risk, but it’s still an unknown. So we’ll be looking to see how those taxes perform over the next year or two.”
The commonwealth is also looking to use public-private partnerships to help upgrade existing transportation, electric, and water infrastructure and finance new capital projects. P3s could enable the island to improve its infrastructure without taking on a lot of additional debt while creating jobs and attracting business development. Fortuño believes there’s an opportunity for Puerto Rico to capture Spain’s interest.
“There’s a lot of capital here that’s looking for opportunities to invest given the economic circumstances here and elsewhere,” the governor said. “So I’m convinced that we would provide them with a unique opportunity and also an entryway into the American marketplace.”
