S&P's multiple notch downgrades of several Puerto Rico bonds to B will have little impact on Puerto Rico's efforts to rebuild its economy and credit, municipal analysts said.
"The ratings are irrelevant to the market," said Bel Air Investments director of municipal research Michael Ginestro.
The market has generally been viewing the credit more negatively than the ratings agencies for quite some time, said Joseph Rosenblum , AllianceBernstein's director of municipal credit research. Even with S&P's new B rating to the general obligation debt - now equivalent to Moody's Investors Service's grade -- the market is already trading the bonds at yields indicating a lower credit valuation, he said.
The fact that S&P downgraded a variety of bonds from a number of public entities to the single grade of B mirrors a growing feeling that Puerto Rico's debt problem requires a holistic solution, NewOak managing director Triet Nguyen said, adding that he did not fully agree with this view. He argued that the different Puerto Rico credits should be seen differently and he said he still believed there was some value to holding bonds from the Puerto Rico Sales Tax Financing Corp. (COFINA).
Nguyen had mixed thoughts about S&P's reasoning for lowering the rating. S&P cited concerns about the commonwealth's liquidity, the implementation risk of a proposed value added tax, and a continued weak economy.
Given the Puerto Rico government's need to significantly reduce spending and/or increase taxes to cut its deficit in the last two years, the ratings agencies should have expected this would be a drag on economic growth, Nguyen said.
S&P should not have been surprised by the weak economy that continues to prevail and, indeed, should have anticipated it. To use the continued weakness as a factor to downgrade the commonwealth now is therefore unfair, he said.
When Puerto Rico passed the Public Corporation Debt Enforcement and Recovery Act, S&P saw this as a negative for the commonwealth's credit. S&P now sees the fact that a court has struck it down also as a negative for Puerto Rico government credit, and this is unfair, Nguyen said.
Nguyen agreed with S&P that implementation of the planned value added tax may be a problem in the short-term for Puerto Rico. Nevertheless, Nguyen said the VAT was a good idea to make Puerto Rico's economy competitive, at least over the long-term.
Rosenblum said he was concerned about Puerto Rico's ability to balance its budget without economic growth. He said he was unsure what the engine of growth was on the island.
Puerto Rico Secretary of Public Works Jorge Colberg Toro responded to the downgrade by saying, "The opinion of Standard & Poor's does not surprise us because it maintains its pessimistic position and because it is not concerned with the wellbeing of Puerto Ricans. Their continuous pressure to provoke abrupt measures such as massive government employee layoffs does not accord with the public politics of this administration.
"We will continue taking steps to address public finances responsibly without firing employees," Colberg Toro said. "The transformation we propose is to establish a tax system with a fairer revenue regime that promotes the country's productivity and economic growth needed to overcome the inherited fiscal situation."
S&P declined to respond to Colberg Toro's statement.
On Friday a spokeswoman for the Puerto Rico Treasury said that the new tax system, if properly instituted, should add about $1.5 million a year in revenues to the government. This would be a roughly 15.6% increase.
When Puerto Rico Gov. Alejandro García Padilla's spoke on Feb. 10 introducing his proposed tax system, he presented a different picture of the economy than S&P did in its downgrade report.
"We continue to reduce crime and our economic development plan has managed to reduce unemployment and increase the number of people working in private enterprise," he said. "Agriculture, tourism, retailing and manufacturing continue to grow. There are many examples like Lufthansa Technik, and core aerospace developments that we have created; as well as expansions in computer science and in the pharmaceutical and medical equipment areas."
"These are real and irrefutable data. This is not optimism but facts. I know there are other sectors that continue to lag behind. I know that much remains to be done Together we will do these things."
