Puerto Rico's governor, vowing to repair the island's damaged credit after Standard & Poor's cut its ratings to junk, said the commonwealth is going ahead with a bond sale in the next few weeks.
The downgrade "is the result of irresponsible fiscal decisions made for decades on the country's credit," Gov. Alejandro García Padilla said Tuesday evening, following the rating cut. "My administration will not be responsible for this deterioration, but I take responsibility for getting the country out of it."
On Wednesday the governor sent bills to the legislature to reduce the anticipated deficit in the General Fund by $170 million in the current fiscal year.
The government plans to gain $75 million through the use of reserves and contingencies that will not be used this fiscal year for various reasons, Office of Management and Budget director Carlos Rivas told The Bond Buyer. An additional $70 million will be gained through mandating a 2% spending cut to most central government agencies. The final $25 million will be found through cutting money for special appropriations for programs, Rivas said.
The government has submitted a bill that reduces appropriations, and not simply cuts spending, by $170 million. This way agencies will not be able to use the money not spent this fiscal year in future fiscal years, Rivas said.
Officials may be considering a sale of $2 billion, according to reports in the Wall Street Journal, which the government hasn't confirmed. S&P downgraded Puerto Rico's general obligation, Public Building Authority, Convention Center District Authority and Infrastructure Finance Authority bonds to BB-plus. It lowered ratings on the GDB, appropriation secured, and Employee Retirement System bonds to BB. Some of the bonds are wrapped by insurance and have higher S&P ratings.
In related actions Standard & Poor's downgraded commonwealth-guaranteed senior-lien bonds from the Puerto Rico Aqueduct and Sewer Authority to BB-plus from BBB-minus. It also cut University of Puerto Rico revenue bonds to BB-plus from BBB-minus.
It put all of the affected bonds on negative credit watch. In the webcast Tuesday afternoon, one of S&P's Puerto Rico analysts said that the island's rum-tax bonds had also been dropped to BB-plus.
Most analysts are saying that the downgrade should not have major implications for Puerto Rico's bond yields immediately. However, the analysts diverge on how they see the medium and long-term future.
"Puerto Rico's troubles have been well-telegraphed and largely priced into the market, underscoring our call for minimal downgrade-related ripple effects," said Blackrock managing director Peter Hayes. The market impact of the downgrade "may turn out to be largely a non-event," said Axios Advisors managing partner Triet Nguyen. Alliance Bernstein senior vice president Joseph Rosenblum said S&P's action was not surprising and that its focus on the GDB's liquidity was appropriate.
"Municipal Market Advisors thinks it is likely other rating agencies will also act in coming weeks, if not days," said MMA managing director Robert Donahue. Moody's Investors Service and Fitch Ratings have their equivalent Baa3 and BBB-minus ratings, respectively, of Puerto Rico's GO bonds on downgrade reviews.
"After balking at what they perceived as usurious rates in the fall, Puerto Rico officials appear to have resigned themselves to paying whatever it takes to get a financing done," Nguyen said. Yields demanded in the secondary market have surged since May. Even after a rally in January, the GOs were still trading at 8.2% at mid-month.
"Even a successful deal would not resolve anything," Nguyen said. "It would only buy the government some more time to bring the economy out of recession. At the end of the day, true market access can only be restored when the island's debt burden is finally aligned with its economic resources, something that hasn't happened in a long time."
In announcing the negative credit watch Jan. 24, S&P cited concerns about island's ability to access the market, said H. J. Sims senior credit analyst Richard Larkin. Yet S&P chose to downgrade the credit just 11 days later, before Puerto Rico could test the market with a bond sale.
"With the governor's announcement last week of eliminating the projected deficit for 2015, I still believe that long-term Puerto Rico bond investors will be repaid in full," he said. "As long as Puerto Rico's fiscal discipline continues, I don't give a damn about a rating agency downgrade, especially one that looks so arbitrary."
Hayes was more pessimistic. "While we applaud the administration's efforts to free-up liquidity and aid the ailing pension system, a restructuring may be unavoidable," he said. "In fact, the island will need to borrow relatively soon to meet its obligations, and it may well find it difficult or impossible to access the market for financing. That may dictate whether Puerto Rico buys some additional time or finds itself pressed into a restructuring."
On Tuesday's S&P webcast S&P analyst David Hitchcock said that the new BB-plus rating assumes that Puerto Rico will be able to sell a bond by the end of February.
On Wednesday the Puerto Rico government said it would seek to renegotiate loans that require accelerated payments due to the S&P downgrades.
The S&P downgrade on Tuesday may be the second largest debt total to a speculative grade in history for a United States municipal issuer, on an inflation adjusted basis. From 1975 to 1977 Moody's Investors Service rated New York City at Caa. The city had $14 billion in debt, which in today's dollars would be $60.6 billion.
While speculative grade issuers are rare in the U.S. municipal market, they are common in the U.S. corporate debt market. While 1.4% of Moody's rated municipal (including nonprofit) issuers have speculative grades, 22% of the corporate issuers have these ratings.
There are two U.S. based corporate issuers with speculative grades that have similar or larger debts at speculative grades than Puerto Rico: Kinder Morgan Inc., which Moody's rates Ba2, has $36.1 billion in debt and SLM Corp, which Moody's rates Ba1, has $150.4 billion in debt.
