S&P Completes Encirclement of Puerto Rico

Standard & Poor’s put Puerto Rico’s barely investment grade general obligation rating on rating watch negative, completing the ratings agencies’ encirclement of the commonwealth’s GO rating.

Following S&P’s decision, announced late Friday, all three agencies now are reviewing the commonwealth’s BBB-minus or equivalent GO ratings for a possible cut to a speculative grade.

S&P focused on what it said was lowered cash reserves at the Government Development Bank of Puerto Rico, which lends money to Puerto Rico government bodies and public corporations, among other responsibilities.

The «GDB could have limited liquidity by fiscal year-end June 30, 2014 without access to the debt market by either GDB or the commonwealth,» S&P analysts David Hitchcock and Horacio Aldrete-Sanchez said. «While we believe the commonwealth may place a sizable sales-tax secured bond issue through COFINA [Puerto Rico Sales Tax Finance Corp.], in our opinion, current market conditions for Puerto Rico debt issuances will require relatively high yields and a limited pool of specialized buyers.»

S&P put on credit watch negative the bonds of the GDB, Puerto Rico Industrial Development Authority, Puerto Rico Highways and Transportation Authority, Puerto Rico Convention Center District Authority, the University of Puerto Rico, and Puerto Rico Employee Retirement System.

It placed on negative watch the commonwealth-guaranteed bonds of the Puerto Rico Aqueduct and Sewer Authority. These are about $1.1 billion of PRASA’s total $4.6 billion in debt. S&P has a stable outlook on the rest of PRASA’s debt.

It put a negative outlook on the BBB rating of the Puerto Rico Electric Power Authority.

GDB interim president José Pagán Beauchamp reiterated his defense of the island’s investment grade ratings.

«As we have stated publicly, the GDB and the Commonwealth of Puerto Rico are comfortable with current liquidity levels and have a variety of options for raising additional liquidity, including a planned return to the public debt markets in the near term. S&P is correct in noting that Puerto Rico’s constitution guarantees the payment of GO debt and Puerto Rico will continue to do everything necessary to honor all of its commitments.»

Pagán continued, «Our administration is continuing its focus on creating sustainable economic growth through job creation, making ongoing progress towards our goal of a structural budget balance by fiscal 2016, and further strengthening our credit profile, market access and liquidity.»

Municipal Market Advisors managing director Robert Donahue said he questioned the health of the GDB.

«MMA believes that GDB’s leadership has done a poor job satisfying investors and rating agencies questions regarding the bank’s liquidity position, offering only vague pronouncements of adequacy,» he wrote in MMA’s Weekly Outlook. «The imminent release of GDB’s fiscal year 2013 financial statements (released in mid-February last year) will provide real numbers and context.»

S&P rates the GDB debt BBB-minus long term and A-3 short-term; the Industrial Development Authority bonds BBB-minus; the Highway and Transportation Authority highway revenue bonds BBB-plus, the HTA’s transportation revenue bonds BBB and the HTA’s subordinate revenue bonds BBB-minus; the Convention Center District Authority bonds BBB-plus; University of Puerto Rico bonds BBB-minus; and the Employee Retirement System bonds BBB-minus. Some of these authorities’ bonds have higher ratings because they are protected with insurance.

S&P didn’t put its A-plus rating on the COFINA bonds on negative watch. However, S&P does have a negative outlook on the bonds.

Meanwhile, a deadline from Moody’s Investors Service for a Puerto Rico bond sale is approaching fast. On Dec. 23 Moody’s said, «An inability or unwillingness to access the market in January 2014 would be a negative rating factor.»

GDB Chairman David Chafey told CNBC last week that Puerto Rico planned to sell a bond in February.

Triet Nguyen in Muninetguide.com commented, «the rating agencies’ fixation on PR’s ‘market access,’ while justified, is now bordering on the absurd. Moody’s, in particular, has been warning the commonwealth to demonstrate market access by the end of January, or face a potential downgrade. Obviously, with only a week to go before month-end, the [Puerto Rico Gov. Alejandro García] Padilla team is not going to make that deadline. Will Moody’s use that excuse to justify a downgrade? We hope not.»

Also on Friday, S&P took actions on three Puerto Rico banks in the private sector. It shifted to a negative watch from a negative outlook on OFG Bancorp’s BB-plus issuer credit rating, B-plus FirstBank Puerto Rico issuer credit rating, and BBB-minus/A-3 Santander BanCorp issuer credit ratings.

While the government’s credit difficulties have little to do with the negative watch on FirstBank Puerto Rico, it is somewhat relevant to the watch on OFG Bancorp and is central to the watch on Santander BanCorp, said S&P analyst Sansierre Newsome.