Standard & Poor’s cited better-than-expected excise-tax collections in boosting Puerto Rico’s $9.2 billion of general obligation debt to BBB from BBB-minus.
The upgrade Monday also affects $4.2 billion of debt issued by various authorities but guaranteed by the commonwealth and paid off from its general fund. Standard & Poor’s also affirmed Monday its BBB-minus rating on Puerto Rico’s $3.3 billion of outstanding appropriation debt.
The outlook is stable. The action came after the government reported that a new 4% excise tax on non-local corporations that began on Jan. 1 generated $108 million of revenue during the first month of 2011, 24% above budgeted estimates of $87.5 million, according to Standard & Poor’s analyst Horacio Aldrete.
Future months could generate additional revenue above January’s 24% spike as many companies opt to shut down temporarily during the first month of the year, Aldrete said. In addition, companies are complying with the tax instead of resisting the levy through lawsuits or other legal measures. The corporations anticipate receiving a matching credit on their federal tax returns.
“These companies have actually credited that tax in their books for U.S. federal income tax purposes,” Aldrete said. “It’s not just the level of collections. In our view, the actual implementation of the tax is meaningful as well.”
The excise tax is expected to generate $1.4 billion of new revenue in 2011. The 4% tax will decrease gradually and end in 2016. In the future, Standard & Poor’s will keep an eye on how the commonwealth plans to tackle its $17 billion unfunded pension liability with its low funding ratio of 9.8%. The retirement fund will run out of money in fiscal 2019.
Moody’s Investors Service rates the government A3 with a negative outlook. Fitch Ratings assigns its BBB-plus rating to the credit. The outlook is stable.
The one-notch upgrade had a slightly positive effect on the island’s bonds trading in the secondary market on Monday.
“The market’s doing all right for Puerto Rico. … On the secondary trading, there’s a bit of an upward market in Puerto Rico,” a New York trader said.
On Monday, a $50,000 block of GO bonds maturing in 2040 with a 6% coupon sold for 98.5 with a yield of 6.11%, according to trades reported by the Municipal Securities Rulemaking Board.
Standard & Poor’s upgrade could help Puerto Rico as it refinances $250 million of public improvement GOs on Wednesday after a one-day retail order period.
“We’re definitely hoping that this will translate into some momentum for the transaction,” said Juan Carlos Batlle, president of the Government Development Bank for Puerto Rico, the commonwealth’s fiscal adviser. “And obviously we’re looking forward to how the market receives it, but we’re very optimistic and looking forward to getting more good news in the future.”
The transaction includes serial maturities and term bonds maturing in 2026 and 2040, said Jose Otero-Freiria, the GDB’s executive vice president for finance.
Along with Puerto Rico’s triple-tax exemption and current light volume in the municipal bond market, the upgrade could help peak interest in the longer, 2040 term bond.
“I think it may help liquidity on that 2040 maturity going forward,” said Tom Spalding, senior investment officer at Nuveen Investments. “There will be more trading.”