Puerto Rico's efforts to stave off a growing financial crisis could turn its bonds into junk-rated debt, BlackRock's municipal bonds group said Thursday.
"They've bought themselves some time before the rating agencies have to consider rating [the territory's bonds] as junk," Peter Hayes, managing director and head of the municipal group said during a roundtable discussion with reporters.
A disconnect between how investors in the municipal market value the U.S. territory's debt and rating agencies' assessment of the bonds indicates that the bonds may face downgrades in the near future, Hayes said, with a junk rating possible as early as 2014. BlackRock has largely dropped Puerto Rico bonds from its $108 billion muni portfolio, with the island's debt representing just 1.5% of total assets, Hayes said.
Heavier taxes proposed by the government there to accrue revenue could hinder much-needed economic growth, said Sean Carney, a municipal strategist at BlackRock.
Puerto Rico's Economic Activity Index has been declining since November 2012, including a dip by 0.4% in August. Yields on Puerto Rico Sales Tax Financing Corporation, or COFINA, bonds have risen to more than 8%, while the commonwealth's public improvement bonds have traded at yields higher than 9%.
"There really isn't a good place to be across the island," Jim Schwartz, head credit research analyst of BlackRock's municipal credit research team, said of the various Puerto Rico bonds. "Each one has its own story."