SAN JUAN, P.R. — Puerto Rico is seeking a one-notch upgrade to its general obligation rating by the first quarter of 2011 and a potential boost to its outlook as the territory plans to issue more than $7.2 billion of refunding and new-money debt in 2010.
Carlos Garcia, president of the Government Development Bank for Puerto Rico, Thursday announced the goal of BBB and Baa2 from Standard & Poor’s and Moody’s Investors Service, respectively, to nearly 400 bankers, investment analysts, and market participants during the 2010 Puerto Rico Credit Conference in San Juan.
The GDB, the island’s financing entity, expects to be active in the municipal bond market during the first half of this year, though the bulk of the transactions will involve refunding prior debt. Officials plan to issue $2 billion of Puerto Rico Electric Power Authority debt, mostly refunding, in two deals during the first and second quarters.
Other transactions during the first half include a potential $110 million GO sale to address a letter of credit that will expire, a $300 million Puerto Rico Highways and Transportation deal to address a mandatory tender, a $125 million qualified school construction bond sale, a $72 million Puerto Rico Ports Authority passenger facility charge bond issue, and a potential sales tax bond refunding.
Potential activity in the third and fourth quarters includes two GO restructuring transactions, a $220 million GO sale as another liquidity facility will end, a $900 million tax and revenue anticipation note sale, $250 million of QSCBs, a $200 million Puerto Rico Public Building Authority refunding, more sales tax bond refundings, and a Puerto Rico Municipal Finance Agency deal of $300 million to $400 million.
Officials are looking for a boost to triple-B from triple-B minus that would follow two years of a fiscal stabilization plan the government implemented in March 2009, three months after Gov. Luis Fortuño took office. Puerto Rico has $9 billion of outstanding GO debt. The credit outlook is stable. Fitch Ratings does not assign a rating to Puerto Rico’s GOs.
Over the past year, the Fortuño administration has implemented temporary tax increases and permanently boosted the sales tax to 7% while also cutting its workforce by more than 14,500, with the remainder of those layoffs to occur by April. Officials anticipate the initiatives will help close a $2 billion fiscal 2010 gap and help end structural deficits by fiscal 2013.
“Given our rhythm and that we’re moving along, I’m pressing for a change in outlook [to positive] this year, hopefully, and an upgrade by the first quarter of next year,” Garcia told The Bond Buyer after his presentation.
The announcement is in line with earlier GDB credit expectations. In October, the bank announced its goal to raise Puerto Rico’s GOs to BBB-plus by 2013 and A by 2017.
The government still has yet to realize $813 million of savings that it will need to help balance the current budget. The $813 million will come from $150 million of operating reductions, $42 million fewer expenses for professional services, $45 million through attrition, and another $35 million from reductions in the island’s health plan, according to Garcia.
Moody’s analyst Emily Raimes said while the administration’s progress over the last year has been “impressive and very positive,” she could not comment on a potential rating or outlook change.
“I understand that they have had some successes in the steps that they’ve taken so far and so I understand that they would like to see that recognized, but obviously I can’t comment on what we’ll do with their rating,” Raimes said in an interview at the conference.
During her presentation, Raimes said Moody’s will be looking for Puerto Rico to continue to reduce its expenses and to cut away at its structural deficit. In addition, she said Moody’s will watch the potential impacts of the governor’s tax reform plan. Fortuño is seeking to reduce income tax rates for all residents and believes that a smaller government with fewer expenses would be able to absorb the reduction of tax revenue.
In addition to his push to strengthen the commonwealth’s GO rating, Garcia announced that the administration anticipates the size of the fiscal 2011 budget to be approximately $9 billion. The governor will release his fiscal 2011 budget proposal in April or May.
Officials estimate the government will receive $7.8 billion to $8 billion of tax revenue in fiscal 2011, which begins July 1, slightly above the administration’s current-year revenue projections of $7.67 billion. Garcia expects an upcoming Planning Board report will show underperforming revenue for the entire year. At the same time, the GDB president believes better tax collections will help offset those sluggish tax receipts.
The bank again expects to use debt restructuring next fiscal year to help ease debt-service payments. So far in fiscal 2010, Puerto Rico has cut its debt-service costs by $400 million this year by extending maturities on outstanding bonds.
“We’re looking at debt restructuring alternatives, as we have done this year, to be able to support this plan as we get to a balanced budget,” Garcia said during his presentation.
The fiscal 2011 budget will also include $60 million to $150 million of funds from the American Recovery and Reinvestment Act. Another $500 million to $1 billion will come from the commonwealth’s local stabilization fund, which is financed with sales tax bond proceeds.
