Puerto Rico Votes for Statehood and New Governor

Puerto Rico's vote for statehood will not likely have any near-term effects on the municipal market, but the vote for a new governor could affect investor confidence, analysts said.

In a two-part, non-binding referendum on Puerto Rico's political status, a slim majority of votes cast opted for statehood.

In the first part of the referendum, 53.99% of the votes were in favor of a new political status, and 46.01% of votes were in favor of remaining a territory.

In the second part, which offered three options for a political status other than territorial, 61.15% of votes were for statehood, 33.31% for a sovereign free associated state, and 5.53% for independence.

As the possibility of becoming a state is one step closer, so is the possibility that the territory could lose its triple tax-exempt status.

Alan Schankel, managing director at Janney Capital Markets, said that it's too soon to tell how the vote might affect the markets.

"I think investors will take a wait-and-see attitude," he said.

Now, if Puerto Rico wants to seek statehood, the territory must petition the United States Congress. Both the House and the Senate must then pass by a simple majority vote a joint resolution accepting the territory as a state. Then the joint resolution would go to the President for his signature.

Earlier this year, President Barack Obama, who was reelected on Tuesday, expressed support for the referendum and pledged to respect the will of the people in the event of a clear majority.

According to Robert Donahue, managing director at Municipal Market Advisors, the statehood option did not actually receive a majority.

"Although some papers are reporting statehood received a 61% majority, the statehood option actually failed to receive over 50% of the vote when factoring about 468,000 blank ballots, which only translates to about 25% of total turnout of 1.83 million."

He added that both Hawaii and Alaska favored statehood by a roughly 95% majority.

Donahue cautions investors to draw any conclusions regarding the statehood vote, calling it largely a "political maneuver by the Fortuno administration" that was not structured seriously and did not receive the support needed.

Schankel said that the vote would likely add to the uncertainty surrounding Puerto Rico's financial situation, which has intensified after the election of a new governor.

In Tuesday's gubernatorial election, 47.85% of votes were for Alejandro Garcia Padilla, whose party favors the status quo, and 47.04% were for the current governor, Luis Fortuno, whose party favors state-hood.

Schankel said that the initial reaction among bondholders will be negative, since Gov. Fortuno has a good track record, trimming the deficit and cutting spending.

"As far as I know, there's no indication that the new guy would radically change the governor's approach to finance, but, at least for bondholders, he's kind of an unknown," Schankel said.

Credit spreads on Puerto Rico's bonds have steadily increased in the past months, which Schankel said is likely due to the uncertainty surrounding the election.

On Nov. 6, yields on Puerto Rico's 30-year general obligation bonds were 225 basis points above the triple-A benchmark.

Schankel said if Gov. Fortuno had been elected, bonds would have probably firmed up a little bit, but with the new governor, bonds are not likely to get any stronger.

The only block trading of Puerto Rico paper on Wednesday morning were Puerto Rico Sales Tax Financing Corporation bonds in 2042, with a 5.5% coupon, which traded at 4.34% and 4.35%. On Tuesday the same sized block traded 9- to 10- basis points lower at 4.25%.

Donahue also noted investor confidence in Fortuno, and that, with a new governor, they may be reconsidering that confidence.

"Investors are now left with a new governor who is relatively untested and not an expert in fiscal matters," he said.

Analysts at Moody's Investors Service said that neither the vote for statehood nor the vote for a new governor would in and of itself affect Puerto Rico's Baa1 rating.

"It's a very long road and there are many complications and fiscal implications to a change in status," said Bob Kurtter, managing director for states at Moody's.

Of the gubernatorial election, he said that Puerto Rico will face fiscal and economic challenges regardless of who is elected in the campaign.

"We'll be watching these measures going forward and we'll be looking forward to meeting with Padilla," said Lisa Heller, lead analyst for Puerto Rico.

Standard & Poor's rates Puerto Rico at BBB and Fitch Ratings at BBB-plus.

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