Moody’s Investors Service downgraded Puerto Rico’s general obligation rating Monday to Baa1 from A3, with a negative outlook, one day before the Puerto Rico Public Building Authority’s planned pricing of $981 million of bonds.
The move reflects “the commonwealth’s continued financial deterioration of the severely unfunded retirement systems, continued weak economic trend, and weak finances, with a historical trend of funding budget gaps with borrowing,” Moody’s said in a report.
The rating agency assigned Baa1 ratings to the building authority’s scheduled $756 million of Series R government facilities revenue bonds, under the qualified school construction bond program, and $225 million of government facilities Series S revenue bonds this week.
Moody’s said the commonwealth’s pension plans “are far weaker financially when compared [with] the pension plans of the 50 U.S. states,” saying their combined total funded ratio is just over 13%.
That puts the funding level a little above the fire and police pension fund in financially strapped Central Falls, R.I., which is 8%.
Moody’s had placed Puerto Rico on its watch list three months ago.
Fitch Ratings on Tuesday assigned both sets of bonds BBB-plus ratings with a stable outlook.
Popular Securities Inc. is the lead underwriter for the sale of the taxable Series R school construction bonds.
Juan Carlos Batlle, president of the Government Development Bank for Puerto Rico, said in an interview Friday that he expected the school bond sale to end up oversubscribed. Taxable interest on those bonds is subsidized as part of the federal stimulus program.
The Series S tax-exempt bonds will repay a line of credit from the Government Development Bank, pay interest on other bonds, and help with construction costs for government buildings.
Ramírez & Co. is the lead underwriter for the Series S sale. Foley & Lardner LLP in Miami is bond counsel. McConnell Valdes LLC in San Juan is counsel for the underwriters. Ortiz, Rivera, Rivera & Co. is the authority’s accounting firm.
Batlle said Friday that the timing of the bond sales is unrelated to recent developments, including the downgrade by Standard & Poor’s of the United States to AA-plus from AAA. He was not immediately available after Puerto Rico’s downgrade was announced Monday.
“This is part of our continuing financial stabilization plan, and has nothing to do with recent developments,” he said. “We are looking to balance our budget. We based our move upon conversations with the underwriters and other participants.”
The GDB is the government’s financing wing.
On July 1, Gov. Luis Fortuño signed the commonwealth’s $9.3 billion budget. The authority’s four-year capital improvement program has $381 million as of June 30, according to a preliminary official statement.