The Puerto Rico government’s reshuffled debt strategy points to its reduced financing options and increased market access risks, Moody’s Investors Service said Wednesday.
Puerto Rico is scaling back planned bond issues as the island’s debt has taken a beating by investors in recent weeks over concerns about the island’s economy and fiscal condition, Detroit’s bankruptcy and wider problems in the U.S. municipal bond market.
“Several factors have contributed to Puerto Rico’s sharply increased credit spreads in recent weeks, increasing the commonwealth’s refinancing risks and exposure to capital markets,” Moody’s said in an issuer comment Wednesday.
As Puerto Rico has put the brakes on some planned long-term issues for the rest of 2013 it has recently raised nearly $1.8 billion through a number of short-term financing deals to strengthen government liquidity and wait out unfavorable market conditions.
“This strategy reflects reduced financial flexibility, and at the same time increased market access risks,” Moody’s said.
The report was issued the same day that Puerto Rico government officials announced that they would seek to expand the borrowing capacity of their top rated credit to obtain more cost-effective financing for commonwealth debt.
Treasury Secretary Melba Acosta and interim Government Development Bank President José Pagán said they were filing legislation Wednesday to the increase the financing capacity of the Sales Tax Financing Authority (known as COFINA) that emits bonds backed by the commonwealth’s 7 percent sales & use tax (known as the IVU). The amendments would increase to 3.5 percent from 2.75 percent the percent amount of the sales tax that can be used for borrowing.
That move came while Acosta and Pagán are in New York City for the second time in less than a week working to instill confidence in the bond market after a rough stretch and head off a potential downgrade by stressing to credit-ratings agencies that Puerto Rico is on the right path to fiscal stability and economic growth. Gov. Alejandro García Padilla is also on an official trip to New York, with a sitdown with representatives from Moody’s Investors Service on Wednesday.
Moody’s, Standard & Poor’s and Fitch ratings all rate Puerto Rico’s GO credit a single notch above noninvestment, or junk, grade, with a negative outlook. Moody’s downgraded the GOs in December and the other two agencies followed suit.
All three credit-ratings agencies peg COFINAs solidly at investment levels with stable outlooks.
Puerto Rico’s GO debt has a constitutional guarantee, while Cofina bondholders are protected by provisions that enable them to get paid off first from the IVU before the government gets paid. In some cases, tax revenue supporting public corporation debt can be “clawed back” to cover GO debt should revenue fall short and the government becomes insolvent.
The new Moody’s report explores recent market events and their impact on the commonwealth’s fiscal profile including widening municipal spreads across the market, but “disproportionately” for Puerto Rico’s securities.
Puerto Rico’s securities are widely held by a diversity of bond funds due to its triple tax-exemption and large volume of debt. As awareness of Puerto Rico’s credit challenges has grown, some fund buyers, including state-specific funds, indicated a desire to reduce their fund exposure to the commonwealth’s various debt securities by selling holdings.
“At the same time, non-traditional investors, including high yield and distressed debt investors, have taken increased interest in Puerto Rico’s securities, attracted by the relatively high yields and large supply of paper for investment grade municipal issuers. As funds have reduced exposure and more speculative investors have accumulated positions, the relationship between yields on Puerto Rico obligations and various municipal indices has been volatile while trending wider,” Moody’s said.
The credit rating agency points to a deepening decline in Puerto Rico’s economy in recent months after some signs that the island was crawling out of a seven-year recession.
Puerto Rico’s economy fell for a ninth straight month in July, plunging by 5 percent compared to the same month in 2012, according to the latest GDB-EAI.
The report said that the average cumulative value for calendar year 2013 (January-July) showed a reduction of 3.5 percent with respect to the same seven-month period in calendar year 2012.
The index fell across the board in July and was down in all four categories measured for the fiscal year: total nonfarm payroll employment, electric power generation, gasoline consumption and cement sales.
Not only does the GDB-EAI show a continuous decline in economic activity, but the extent of the decline has been growing throughout 2013.
The GDB-EAI had returned to growth in December 2011 for the first time since Puerto Rico’s recession began in 2006. It showed small but consistent year-over-year gains for nearly a year before beginning to retreat again last October. Since then, it has been on a steadily steepening decline: falling 0.7 percent in November, 2012, 1.3 percent in December, 2012, 1.8 percent in January, 3.1 percent in February, 3.1 percent in March, 3.5 percent in April and 3.4 percent in May and 4.5 percent in June.
“These actual results compare negatively to the commonwealth’s prior forecast of 0.2% growth for fiscal 2014,” Moody’s said. “While yields in general have widened, this confluence of events contributed to a further widening of Puerto Rico yields despite positive steps taken by the government to increase revenues and reform the commonwealth’s troubled pension system.”
Certain tax exempt Puerto Rico maturities have traded with yields as high as 10 percent in the past two weeks, levels not frequently seen for investment grade municipal paper in the still historically low interest rate environment.
As a result, the Puerto Rico government has scaled back its borrowing plans for the balance of 2013 from $2.6 billion to a range between $500 million and $1.2 billion. The commonwealth had initially planned to issue approximately $600 million in general obligation bonds this fall to cover part of budgeted $575 million of debt service restructuring and $245 million of deficit financing. The Puerto Rico Highways & Transportation Authority had also planned to issue $1.7 billion to $2 billion of revenue bonds in multiple offerings to refinance the public corporation’s obligations to the GDB during fiscal 2014.
In the meantime, the commonwealth has issued several unrated short-term private placements to meet its liquidity needs, including $1 billion in general obligation tax revenue anticipation notes (TRANs) for the fiscal 2014 budget, $400 million in PRHTA bond anticipation notes (BANS), and $400 million in general obligation BANS, and plans to issue at least $200 million in additional TRANs for budgetary support before the end of the year.
The GDB raised $400 million in bond anticipation notes (BANs), which will be used to pay off a portion of the $2.2 billion line of credit it has extended to the Highways & Transportation Authority, GDB interim President José V. Pagán Beauchamp said.
The PRHTA BANS were used to pay off a portion of the $2.2 billion line of credit the GDB extended to the authority. The GO BANs refinanced GDB and private bank loans and financed a portion of the debt service restructuring for fiscal 2014.
Puerto Rico also issued a $333 million BAN secured by sales tax revenues (issued through COFINA) in April of this year as part of the commonwealth’s total $1.1 billion fiscal 2013 deficit financing.
“The short-term borrowings allow the commonwealth to meet its combined $1.2 billion near-term cash needs on a timely basis without accessing the capital markets. However, the reliance on short-term borrowing increases its exposure to refinancing risk, which had been relatively modest until now,” Moody’s said.
“If market conditions remain unfavorable, or the commonwealth is unable to roll the short term financings, it would likely look to the GDB to support the notes’ repayment,” Moody’s said, adding that the GDB is an important component of its analysis of the commonwealth’s refinancing risk profile.
“The commonwealth’s revised financing strategy has shown that their financial flexibility has been reduced, though lending from private sector banks continues,” Moody’s said.
The credit-rating agency deems the subordinate PRHTA BAN terms favorable in the short term, but noted carry high penalties if not repaid within 12 months. The PRHTA BAN is structured with steeply increasing interest rates, raising the cost of funds from 2.4 percent if the bonds are redeemed within 12 months to 11.4 percent if the bonds are not redeemed within 18 months. (The TRANs were all issued as short-term private transactions and terms of the financings have not been disclosed.)
The commonwealth, however, has been able to take advantage of the low interest rate environment the past several years and proactively refinanced its debt lowering overall interest costs, Moody’s said, pegging the current public debt outstanding at more than $70 billion of public debt outstanding and net tax-supported debt outstanding at more than $52 billion.
While rising rates will increase the commonwealth’s overall cost of funds, it is unlikely to represent a significant increase over the current cost of funds, according to Moody’s.
Moody’s noted that the Treasury Department said tax collections are ahead of projections for the first two months of fiscal 2014 (July-August) but trail collections from the same period a year ago as new revenue measures begin to come online.
The $9.77 billion general fund budget for fiscal 2014 (which started July 1) is a $688 million increase over the fiscal 2013 budget. The consolidated fiscal 2014 budget, which includes federal funds, will near $29 billion.
The budget contains $1.38 billion in revenue from a range of new taxes and collection efforts.
There is a lot riding on meeting those tax targets as the administration works to avoid a credit downgrade to junk territory.
Moody’s Investors Service said in an earlier report that revenue from a range of new taxes and collection efforts implemented to fund this year’s budget have “mixed credit implications,” with Puerto Rico maintaining its investment grade dependent on whether revenue targets are met.
“Further weakening of economic growth could result from the additional corporate and sales taxes, as well as increased tax compliance and enforcement measures,” Moody’s said in July. “Despite the increase in much-needed recurring revenue for the commonwealth, weaker economic conditions would also increase negative pressure on the rating.”
The commonwealth had planned $820 million of deficit financing and debt service restructuring for fiscal 2014, and that amount could increase if projections fall short, Moody’s said Wednesday. While net liquidity at the GDB was over $3 billion at the end of fiscal 2012, that amount has narrowed significantly due to continuing loans to the commonwealth and other authorities and the inability to refinance certain lines in the long-term market.
The GDB reports that it has access to approximately $2.8 billion in public deposits of the commonwealth’s agencies, public corporations and municipalities at private banking institutions which are in the process of being moved to GDB.
“If the GDB is unable to strengthen its liquidity position and the commonwealth faces extended difficulties accessing the long-term market, the commonwealth’s overall liquidity position could become severely strained,” Moody’s concluded.
Have we lost hope?
By : CARLOS ROMERO BARCELÓ
Edition: September 19, 2013 | Volume: 41 | No: 36
The worst that can happen to any town, island, state, territory or nation is to lose faith in its leaders’ capabilities to cope with any crisis, particularly, an economic crisis. There is no doubt that hopelessness breeds despair and everything begins to feel as though nothing is going right, and whatever the leaders do, becomes undone, fails or creates additional problems. If, under the conditions prevailing in an economic recession, government leaders make false promises, provide false reports and claim achievements that the public knows are false, or will soon find out that they are false, then despair and hopelessness become intolerable.
All attempts to instill hope and confidence in the community will fail, unless leaders who are sincere tell the truth and can offer logical and credible solutions, appear on the scene and have the leadership qualities that make people believe in them and follow them.
Unfortunately, in Puerto Rico, just the opposite is happening. Gov. Alejandro García Padilla and his political cohorts keep making promises they should know will never be fulfilled and they keep telling the public of alleged achievements, which most people know aren’t true.
One glaring example of this is the governor’s and his cohorts’ claim that the Puerto Rico Electric Power Authority (Prepa) has reduced the monthly charge for electricity. However, the public knows that this is a lie. The commercial electric bills were about 29¢ per kilowatt-hour (kWh) in 2012, and today, it is still about 29¢ per kWh. The residential electric bills were about 26¢ per kWh last year, and today they are still the same. I have all my office and residential bills for 2012 and through July 2013 to verify what I have just indicated.
Another false claim that the governor has repeated dozens of times is that thousands of jobs have been created since Jan. 1. However, the federal government’s employment data published by the Bureau of Labor Statistics tells us that as of May 31, 2013 we had 42,000 less jobs compared with the same period a year ago. This means that to fulfill his campaign promise, which he has repeated dozens of times since Jan. 2, García Padilla must now create 92,000 jobs in 13 months, instead of 50,000 in 18 months. The governor has undermined his credibility beyond repair, and even worse, he has become the favorite subject of jokes in many websites.
The economic recession has become so critical that it has affected all other areas. The crime rate, particularly as it pertains to homicides, has become one of the worst in the Western Hemisphere, nearly as bad as in traditionally dangerous areas of Asia and Africa. Not only has our crime rate increased to intolerable levels, but our education and health services have also been deteriorating as we experience an unacceptable exodus of teachers, professors, doctors, nurses, engineers, scientists, law enforcement agents and other professionals. They have packed up and moved to one of the 50 states in search of jobs, better jobs, better economic and professional opportunities, better health services for their families, better and less expensive education for their children, and a safer community, where they can walk the streets at night. In short, they left our island in search of better quality of life.
In other words, whereas the exodus of the 1950s and early 1960s was made up of the poorest and least educated on our island, the exodus today has been referred to as a brain drain. Our departing fellow citizens are from the most productive sectors of our community, which not only diminishes our competitiveness in the production of wealth, but also increases the percentage of elderly and nonproductive people who stay in Puerto Rico. The result: less government revenue and a higher demand for services, particularly healthcare services. In the past 10-year census, our population diminished for the first time in history. Our population is several hundred thousand people less than it was 13 years ago.
Since the high density of our population has been pointed out as one of our economic problems, some people may point out that the reduction of our population is a positive development. However, although it could have been a positive result, it is just the opposite because the population exodus is from the professional, better-educated and most productive sectors of our community.
In the area of real estate alone, the families leaving are overwhelmingly homeowners. As a result of this exodus, our housing inventory is worse because too many homes which wouldn’t have been sold in the past are now being put up for sale at very low prices; this further diminishes the value of recently built homes.
Obviously, if the citizens leaving Puerto Rico are from the middle class, the professional sector and are among the most productive, they are the ones who should be enticed to stay. They are the ones who should be receiving tax credits and less regressive taxes, which inevitably increase the cost of living.
The governor and his economic advisers keep talking about a new economic development policy, but they always come up with more income-tax credits and exemptions for the billionaires and the wealthiest. At the same time, the white-collar workers, blue-collar workers, professionals and educators, doctors, and the most productive in our community, have been and are being penalized, with a higher sales & use tax (IVU by its Spanish acronym). These taxes are not only very regressive, but they are also increasing the cost of the goods and services we consume daily, thereby reducing the purchasing power of the middle class and blue-collar workers, which are the moving force in our economy.
Not happy with merely increasing the cost of goods and services subject to the IVU, the governor and his advisers have also doubled the gross-revenue tax (patentes), by adding a state gross-revenue tax, which, until this year, was only imposed by municipalities. The governor and his cohorts add salt on the wound when they say such a tax doesn’t increase the prices of goods and services. Of course it does. Since when are taxes not passed on to the consumer? The remedy to our recession isn’t more taxes, with the middle-class and blue-collar workers already drowning in taxes, and giving more tax credits and exemptions to the multibillion-dollar companies and billionaires. On the contrary, we must eliminate some of the new taxes imposed, such as the new state tax on gross revenue, reduce some or all of the IVU recently imposed, and reduce the level of income taxes on the middle-class and blue-collar workers.
Of course, you will wonder: How can we run the government and pay our government’s debt? As I have suggested for years, and I did in 1978 when I was governor, we must impose more taxes on those who earn the most and hardly pay at all. If we decided to impose an income tax of 10% on net income to the companies that now pay only about 3.5%, our government would collect about $4.5 billion a year, almost three times what it now receives from those companies. We would have more than enough revenue to balance our deficit and capitalize the Government Retirement Fund by paying an agreed amount every year from the additional revenue of at least $3 billion annually.
To overcome this economic recession, the government must reverse its course. The only place where we can find money to solve our fiscal deficit and overcome this recession is by cutting taxes that are choking our middle class, professionals, small businesses and blue-collar workers and tax the privileged, under-taxed multibillion-dollar companies and individuals. A just and fair-minded government can do nothing else. Only then will the people regain their faith and hope for the future economic development of our island.
Carlos Romero Barceló is a two-term former governor of Puerto Rico (1977-84), a two-term former resident commissioner (1993-2000) and a two-term former mayor of San Juan (1969-78). He was president of the New Progressive Party for 11 years. He is now a consultant involved in real estate, doing business as CRB Realty. His email address is email@example.com. Comments on this article are welcome at caribbeanbusiness.pr. Go to the “Sign in” link on the homepage to participate. Emails also may be sent to firstname.lastname@example.org.