S&P Changes Puerto Rico’s GO Outlook to Positive Ahead of $350M Deal

Standard & Poor’s Monday revised its outlook on Puerto Rico’s $9 billion of general obligation debt to positive from stable as the commonwealth plans to issue up to $350 million of tax-exempt GO bonds to restructure existing debt and refinance variable-rate bonds.

Standard & Poor’s affirmed its BBB-minus rating on the GO credit.

The positive outlook is due to the commonwealth’s ability to cut its structural deficit to $1 billion in fiscal 2011, which began July 1, from $3 billion in fiscal 2009. Officials aim to end recurring budget imbalances by fiscal 2013.

Since taking office in January 2009, Gov. Luis Fortuño has slashed Puerto Rico’s payroll by 17%, implemented a property tax, increased corporate and income taxes, and reduced government spending to address its recurring budget shortfalls.

“The outlook revision is based on our view of the commonwealth’s recent implementation of significant expenditure controls and revenue enhancement measures that we believe could help restore budget balance within the next two years,” Horacio Aldrete, an analyst at Standard & Poor’s, said in a statement.

Standard & Poor’s also rates the commonwealth’s appropriation debt BBB-minus. The outlook is stable “because even if the GO rating is raised in the next two years, the appropriation rating would remain one notch below the GO rating.”

Carlos Garcia, president of the ­Government Development Bank for Puerto Rico, said that while the commonwealth believes the credit rating should be higher than BBB-minus, the change to a positive outlook is a step in the right direction. The GDB is the commonwealth’s fiscal agent.

“I think it reinforces what we’ve been saying, that we have been ahead of the curve by taking such actions early, especially the difficult actions that need to be undertaken,” Garcia said.

Standard & Poor’s could boost the rating if the commonwealth’s economic performance improves, budget controls remain in place, and officials strengthen Puerto Rico’s pension fund, which is only 9.8% funded.

The GDB is working on issuing up to $350 million of refinancing debt. The fiscal 2011 budget relies on $250 million of debt restructuring to move debt-service costs due this year into future years. The transaction may also include $100 million to refinance floating-rate debt into fixed-rate mode as bank liquidity facilities will expire on the variable-rate bonds.

Officials held off on pricing the ­refinancing deal this week and are watching the market for more favorable conditions. Garcia anticipates the revised outlook will help Puerto Rico’s GO credit at market.

“We will do it when market conditions are appropriate to do it,” Garcia said. “If market conditions are appropriate in December, we will do it then. If not, we will do it in January.”

Morgan Stanley is the book-runner on the transaction. Barclays Capital is co-senior manager on the deal.

Moody’s Investors Service on Aug. 10 revised Puerto Rico’s GO outlook to negative from stable. Moody’s rates the commonwealth A3. It cited Puerto Rico’s $17 billion unfunded pension liability as the reason for the outlook change. The system will run out of assets by fiscal 2019.

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