Following in the footsteps of its fellow rating agencies, Fitch Ratings downgraded Puerto Rico debt to BBB-minus from BBB-plus on Wednesday.
The rating action affects $10.6 billion in commonwealth general obligation bonds, $1.38 billion in Public Building Authority government facilities revenue bonds guaranteed by the commonwealth, $658 million in Puerto Rico Aqueduct and Sewer Authority commonwealth guaranty revenue bonds, and $2.9 billion in pension funding bonds from the Puerto Rico Employees Retirement System.
Fitch retains a negative outlook on the bonds.
In explaining its action, Fitch noted that economic and revenue underperformance has led to a significantly larger expected budget operating imbalance for the current fiscal year. These things also means the gap for fiscal year 2014 is also much larger, unless Puerto Rico Gov. Alejandro García Padilla takes major steps to address the budget gap.
“Fitch does not believe that structural budget balance will be achieved in fiscal 2014, and meeting this goal will remain challenging thereafter,” wrote Fitch senior director Karen Krop.
Krop also noted the island’s recent deep recession. “After signs of stabilization in 2012, recent performance has weakened and prospects for near-term growth are limited.”
Puerto Rico has exceptionally high levels of bonded debt. Despite García Padilla’s recently introduced plan to prevent the depletion of its pension system assets, Krop says this will happen in the near future.
On the plus side for the bonds’ ratings, Krop wrote that it is likely the commonwealth’s legislature will pass a pension reform in the near future.
Also, both the current and prior gubernatorial administrations have made progress in restructuring fiscal operations and in improving financial responsibility, Krop wrote.
For the government’s debt to remain at the current rating level it must make substantial progress toward balancing its budget without relying on debt restructuring, she wrote. For the government’s debt to remain at the current level, the government must also reform the pension system to ensure its long-term solvency while limiting the pension’s demands on the budget.
In response to Fitch's actions García Padilla responded, "The rating adjustment does not come as a surprise to us. As the country is aware, the fiscal situation we inherited is highly delicate and required immediate attention; which we are diligently providing."
García Padilla continued, "Since our administration took office we have been implementing swift and responsible fiscal measures in order to narrow the huge structural deficit weighting on the Commonwealth's Government, as both Fitch and Standard & Poor's have already recognized. My administration will stabilize our public finances with determination and sensitivity towards our people. With solid commitment and dedication we will come out of this critical juncture."
Fitch placed a variety of Puerto Rico government obligations on rating watch negative on Feb. 21.
Standard & Poor’s dropped Puerto Rico’s GO debt to BBB-minus on March 13. Moody’s Investors Service downgraded this debt to the equivalent Baa3 in December.