Moody's Investors Service yesterday revised the outlook to negative from stable onPuerto Rico's general obligation bond rating, saying it is concerned about thecommonwealth's borrowing to bridge budgetary shortfalls as well as a sizable pensionsystem liability.
Moody's rates Puerto Rico's $15 billion of GO, commonwealth-guaranteed, andappropriation-backed bonds Baa1. Puerto Rico, which enjoys triple tax-exempt status inthe municipal bond market, is planning to sell $550 million of GO bonds Thursday as wellas $800 million of tax and revenue anticipation notes later this week.
Moody's analyst Tim Blake said that new information for Puerto Rico's 2004 fiscal yearshowed that it was forced to borrow $233 million from the Government Development Bank ofPuerto Rico to retire Trans it sold last year. "It was unexpected and disappointing,"Blake said. "That's the trigger."
Moody's said that in fiscal 2003, Puerto Rico borrowed $250 million from the GDB. Bothloans are
expected to be paid back over a five-year period, it said.
According to the report, the government recently estimated that at the end of June ithad $11 billion in unfunded pension system liabilities. At one point, the pension fundwas forced to borrow money from a local bank so it could make its pension fund payments.
The report also noted that there is a large structural imbalance in the budget forfiscal 2005 with "expenditures exceeding revenues by a wide margin."
On the positive side, the report noted that the commonwealth's government has enoughlegal power to raise revenue and adjust revenues as is necessary. Puerto Rico's long-standing, and continuing, political and economic links to the U.S. have been key to theisland's economic expansion and real income growth over the last 20 years.
Standard & Poor's rates Puerto Rico A-minus and assigned a negative outlook last year,citing similar concerns. Fitch Ratings does not rate the island."We're kind of holding off from taking any rating action based on the knowledge thatthey will be having an election in November," said Kenneth Gear, Standard & Poor'sanalyst. "We want to see what their plans and vision are for the commonwealth's future."
The Moody's revision could have an impact on this week's long-term bond sale. EvanRourke, a fixed-income strategist at Popular Securities in New York, said that thecommonwealth might have to pay a couple of additional basis points in yield to investorsin order to compensate for the increased risk that Moody's has identified.
Some investors may have picked up on that risk already. Since 2003, spreads havenarrowed between Puerto Rico's 10-year GO bonds and other Baa bonds.
According to Thomson Financial, Puerto Rico has sold about $5.955 billion of insured GObonds over the last 10 years. MBIA Insurance Corp. provided insurance for about $2.32billion of that debt at the time of issuance, Financial Security Assurance Inc. was thesecond-largest insurer at about $1.50 billion, and Financial Guaranty Insurance Co.insured about $1.277 billion.
Puerto Rico is also likely to sell $170 million of appropriation-backed debt before theend of the year in a negotiated sale. If sold, the bonds would provide permanentfinancing of $230 million for the Coliseum of Puerto Rico, which opened at the end ofAugust. If the deal goes through, the debt will be sold by the Public Finance Corp., asubsidiary of the GDB.
Elizabeth O'Brien contributed to this story.
