By Steven C. Johnson
NEW YORK Feb 11 Fitch on Tuesday became the
third credit rating agency in a week to downgrade Puerto Rico to
junk, citing worries about the cash-strapped U.S. territory's
weak economy and reduced ability to finance itself in capital
The move was not a surprise coming as it did after last
week's downgrades by Standard & Poor's and Moody's Investors
Service left the U.S. territory struggling to avoid default.
Puerto Rico has some $70 billion of debt outstanding and has
long struggled with a shrinking economy and population.
Fitch dropped the commonwealth to BB, two notches below
investment grade, from BBB-, saying recent downgrades "have
triggered new liquidity requirements and lowered expectations
for the market available for the commonwealth's debt going
The agency praised recent government reforms, including its
pledge to balance the budget in fiscal year 2015, and said the
government's commitment to bondholders "remains strong."
But it pointed to a chronically weak economy and high debt
and pension liabilities as major challenges.
"This has created spending pressures and limited the
commonwealth's ability to use additional leveraging," Fitch
Fitch's move comes shortly after Puerto Rico announced plans
to issue general obligation bonds to refinance debt and ease a
liquidity crunch, though the timing of the sale is
"We are disappointed with Fitch's decision, though we are
pleased that it has recognized Puerto Rico's quick and decisive
response to challenges that have arisen in recent years,"
Treasury Secretary Melba Acosta Febo and Government Development
Bank Chairman David Chafey said in a statement.
Since S&P downgrade last week, trading of Puerto Rico debt
has exploded in the secondary market.
On Monday, the territory's general obligation refunding
bonds were the most actively traded debt in the $3.7 trillion
market, with an average yield of 8.53 percent over 88 trades.
The average yield on the bonds was 8.24 percent just one
trading day before. The territory's aqueduct and sewer bonds
were the fourth-most traded on Monday, with an average yield of
8.695 percent over 62 trades, Municipal Securities Rulemaking
Board data shows.
Currently on Municipal Market Data's benchmark scale a
10-year Puerto Rico GO bond is yielding 10.27 percent, a spread
of 775 basis points over the highest rated municipal bonds.
Fitch also cut the ratings on debt from Puerto Rico's Public
Building Authority, Aqueduct and Sewer Authority and Employees
Retirement System to junk.
Its ratings remain negative, suggesting Puerto Rico may be
vulnerable to a further downgrade.
Like S&P last week, Fitch did not cut the rating on bonds
secured by the commonwealth's sales and use tax. Moody's did cut
those bonds ratings, though they retain investment grade status.