Standard & Poor's downgraded Puerto Rico's general obligation rating to B from BB, citing concerns about liquidity, the implementation risk of a proposed value added tax and a continued weak economy.
Simultaneous with the downgrade to the GO, S&P downgraded the Puerto Rico Sales Tax Finance Corporation (COFINA) first and second-lien sales tax bonds, Puerto Rico Infrastructure Finance Authority (rum tax), and Puerto Rico Convention Center District Authority (hotel tax) bonds to B, according to a statement Thursday.
It also downgraded Puerto Rico Municipal Finance Agency's, Puerto Rico Employees Retirement System's, and the commonwealth's general fund-supported appropriation and moral obligation bonds to B.
All the ratings retain negative outlooks.
"We believe Puerto Rico has experienced and will continue to face a major reduction in its ability to obtain external liquidity at a reasonable cost," said S&P analyst David Hitchcock. Because S&P believes the commonwealth will have constrained capital market access, S&P used an override factor within its rating methodology to reduce the GO rating to B.
Puerto Rico's access to the capital markets could deteriorate, Hitchcock and his associates said in their report.
Hitchcock said Puerto Rico faces implementation risk with a planned 16% value added tax in the short term. The VAT's revenues may be difficult to predict and the measure may have negative economic implications.
Finally, Hitchcock and his associates pointed to the commonwealth's continued economic weakness: "We still believe economic growth is necessary for the commonwealth to pay growing debt service, pension, and health care costs and, in our view, the prospects for this have declined in recent months."
Government Development Bank President Melba Acosta Febo expressed disappointment with the S&P decision.
"We remain committed to the implementation of our fiscal and economic development plans, and to addressing both near- and long-term challenges,"
she said in an email. "COFINA bonds will continue to receive a pledged portion of the proposed value added tax, while the structure, security and payment system remain unchanged pursuant to the fulfillment of COFINA obligations."
Acosta Febo said the revenue stream attached to COFINA bonds remains separate from the commonwealth and will only further increase under the proposed VAT tax with the expected increase in the tax base.
"To that end, we will continue to operate in accordance with COFINA bond covenants while the bond trustee will continue to be provided with written confirmation that all pledged revenues for COFINA bonds have been satisfied pursuant to the bond covenants and guarantees," she said. "Moreover, we intend to provide third party legal opinions with respect to compliance with COFINA's covenants under the bond documents."
Puerto Rico's GO bonds are currently rated B2 by Moody's Investors Service and BB-minus by Fitch Ratings.
