Puerto Rico's fiscal mess left it more vulnerable to Irma's devastation

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Hurricane Irma's impact on Puerto Rico’s economy may be worse because of the island's debt and fiscal crisis, municipal analysts said.

The eye of Irma passed by the north coast of Puerto Rico on Wednesday.

“Entities that suffer a natural disaster need a strong balance sheet to take care of immediate clean-up and assessment needs until funding from the federal government and insurance companies becomes available,” said Howard Cure, director of municipal research at Evercore Wealth Management. Puerto Rico doesn’t have the resources to start things on its own.

Puerto Rico has experienced more than 10 years of general economic decline. Its government finances are very tight and it is attempting to restructure its roughly $69 billion of public sector debt.

On Thursday morning Gov. Ricardo Rosselló said 70% of the island’s residents were without electrical service and 18% were without water.

Puerto Rico’s need to repair its power and water systems will be “on top of the fact that the infrastructure of the commonwealth has been neglected for many years,” Cure said. Irma’s damage “could expedite the downward spiral of the economy and could cause even more of the workforce to leave.”

Moody’s Investors Service senior credit officer Rick Donner also focused on infrastructure.

“Reports of widespread power outages that may persist for weeks in Puerto Rico following Hurricane Irma highlight longstanding liquidity pressures and an aging infrastructure that have beleaguered [the Puerto Rico Electric Power Authority] (rated Ca/negative outlook) for many years,” he said in an email.

“Long-term power outages will have negative impacts on PREPA’s revenues and will pose added challenges in Puerto Rico’s overall recovery from this natural disaster," Donner continued. "Any damage from the storm will also add to the stress related to PREPA’s recent default and could impact ultimate recovery for bondholders.”

AllianceBernstein credit analyst John Ceffalio agreed with Cure that a greater population exodus because of the storm would exacerbate Puerto Rico’s economic problems.

Ceffalio said the amount of federal aid will be important in determining the course of Puerto Rico’s recovery.

On Thursday the U.S. Senate passed $15.25 billion in aid for victims of Hurricanes Harvey and Irma, including $7.4 billion in grants for housing, $7.4 billion for Federal Emergency Management Agency assistance, and $450 million for the Small Business Authority disaster loan program.

After Superstorm Sandy in 2012 the federal government gave aid to the Long Island Power Authority to harden its electrical system against future storms. If something similar is done for the Puerto Rico Electric Power Authority, it could help it out over the long term, Ceffalio said.

On Thursday, S&P Global Ratings said that how long it takes for bond issuers to financially recover from a major natural disaster partly depends on the issuer’s financial strength prior to the disaster. Credit analyst Jane Ridley said in her report ‘How Long ‘Til We Get There? Major Post-Hurricane Recoveries In Recent Years,’ that weaker credits tend to take longer.

While New York City’s AA rating was unaffected by Superstorm Sandy, New Orleans’ BBB-plus rating was downgraded after Hurricane Katrina in 2005 and took eight years to return to that level, Ridley said.

The three major rating agencies rate Puerto Rico’s debt near the bottom of their rating scales.

“While the rebuilding efforts might be an economic stimulus for jobs and sales tax receipts, unless monies are available from the federal government in the form of grants to repair and upgrade the infrastructure, I still think it will be a net negative for Puerto Rico,” Cure said.

According to Rosselló, as of Thursday morning authorities knew of three deaths connected to Irma. The storm had its greatest impact on the Utuado municipality in a mountainous region in the central western part of Puerto Rico, on the Fajardo municipality on the northeast coast and Culebra Island off the east coast.

Rosselló said that there were many trees obstructing public roads and electrical posts on the ground. With up to 12 inches of rain expected in parts of Puerto Rico on Thursday alone, the governor warned of possible floods and landslides.

Despite the very real damage, the El Vocero newspaper had words “Isla Bendecida” [Blessed Island] on its cover Thursday morning, because residents thought the island had largely avoided what could have been a devastating storm.

On Wednesday Puerto Rico Oversight Board executive director Natalie Jaresko said, “We are working closely with Gov. Rosselló to coordinate support for Puerto Rico in the aftermath of the storm. We have also reached out to the federal government to activate Title V of [the Puerto Rico Oversight, Management, and Economic Stability Act,] which allows the board to work with agencies to accelerate the deployment of grants and loans following a disaster.”

Lynn Hume and Brian Tumulty contributed to this story.

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