UPDATE 1-Fitch puts Puerto Rico debt on ratings watch negative

Thu Feb 21, 2013 3:27pm EST

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Feb 21 (Reuters) - Fitch Ratings on Thursday placed its BBB-plus rating for Puerto Rico general obligation bonds and other debt on a ratings watch negative.

Noting the U.S. commonwealth faced a "significant increase" in operating budget imbalances, Fitch said in a news release that it expected to meet soon with government officials and would resolve in early March the watch status that also affects Puerto Rico pension bonds and other debt.

A big seller of bonds in America's $3.7 trillion tax-free market, Puerto Rico pays the highest rates of any big issuer, partly because of a weak economy, chronic budget deficits and unfunded pension liabilities of $37.3 billion.

In December, in an action affecting $38 billion of debt, Moody's Investors Service slashed Puerto Rico's credit rating by two notches to Baa3, just slightly above non-investment grade, with a negative outlook.

"The negative rating watch is based on the economic and revenue underperformance which Fitch believes has meaningfully increased the size of the operating imbalance for the current fiscal year and the gap the commonwealth will need to address as it develops a budget for 2014," the credit agency said.

"Fitch does not believe that a balanced budget will be achieved in fiscal 2014, and meeting this goal will remain challenging thereafter."

The ratings watch covers Puerto Rico's GO bonds; Puerto Rico Building Authority government facilities revenue bonds backed by the commonwealth; Puerto Rico Aqueduct and Sewer Authority commonwealth guaranty revenue bonds; and Employees Retirement System of the Commonwealth of Puerto Rico pension funding bonds.

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