Municipal market participants believe Puerto Rico Gov. Alejandro García Padilla's speech was a credit positive, but doubt it's feasible to balance the Commonwealth's budget by fiscal 2015.
"It appears to be positive with focus on restraining costs rather than using deficit financing to get through the coming year," Ted Hampton, vice president and senior analyst at Moody's Investors Service, said in an interview. "The governor is putting forth some proposals that also may be difficult to implement. Just the mere fact they have been put on the table does not change our view of the credit."
The Governor's proposed budget plans to decrease general fund spending by $300 million to $9.6 billion by June 2014, according to a report Janney Capital Markets released on Wednesday. It also intends to close a structural gap of $1.5 billion with $800 million in savings achieved by freezing automatic pay increases for government workers as well as $700 million in spending cuts.
"[The] budget balance is being reached pretty much as I thought it would, but the biggest `pleasant' surprise is the Governor's new initiatives to jump-start the economy," Richard Larkin, senior vice president and director of credit analysis at HJ Sims & Co., said in an email. "Overall, the budget is a credit positive."
A trader in Virginia described the budget as "optimistic."
"The budget gives the market the sense they are going to try to resolve these issues," he said. "We will just have to wait and see if anything like that can actually be pulled off."
The Puerto Rico government has not always complied with the Governor's wishes. On April 11 the Puerto Rico Supreme Court's declared unconstitutional certain parts of the commonwealth's teachers' pension reform plan, reform the governor had said was critical to Puerto Rico's economic recovery. In a report released Monday, Bank of America Merrill Lynch described this ruling as a "setback."
Hampton said that one of the main issues is that the governor wants to impose a lot of expenditure cuts without laying off employees.
"It's important for us to get a sense of how they will actually realize those savings plans," he said. "Anytime a government cuts expenses, there can be economic repercussions. This can be particularly true in the case of Puerto Rico, which has a vulnerable economy and relies more heavily on the government to generate employment."
Larkin described his visit with Puerto Rico officials last month as "positive."
"However, meetings and phone calls with the Government Development Bank provided no new information except that they disclosed hiring a restructuring/reorganization firm around the time of the last bond sale; nothing more was offered," Larkin said in the email. "They are playing things close to the vest, like a lawyer would."
Yields for Puerto Rico's 8% bonds maturing in 2035 dropped to 8.73%, 10 basis points below Wednesday's levels. This is, however, a 10 basis point rise from Thursday morning.
Trading volume on the GO has also declined to 36.8% below its 100-day average, and volume for all of the Commonwealth's GOs is 9.5% below its 100-day average.
The trader in Virginia still believes investors will buy the bonds because of their high-yield and exemption from state, local and federal taxes.
Puerto Rico is currently the fifth most heavily traded U.S. state or territory, according to data provided by Bloomberg. It is trading at 51.6% above its 100-day average. This is largely due to trading on the Puerto Rico Sales Tax Financing Corp. (Cofina) bonds, which are trading 273.8% above their 100-day average.
The muni market strengthened Thursdayas yields for six-to eight-year maturities fell one basis point, but were unchanged for May roll according to data provided by Municipal Market Data. Yields for nine-to 12-year maturities had a two basis point drop that MMD said was only one for the May roll. Yields on maturities in 13 years decreased by three basis points adjusted to one basis point for the May roll. Yields for 14-to 30-year maturities fell from three-to-five basis points.
Yields for the two-year held steady at 0.38%, fell by one basis point for the 10-year to 2.32%, and by four basis points for the 10-year to 3.61%, according to Municipal Market Advisors.
Treasuries were steady Thursday with the 10-year benchmark and the two-year notes remaining unchanged from Wednesday's market close at 2.62% and 0.42%, respectively. The 30-year yields fell five basis points to 3.41%.
