Nov 14 Fitch Ratings said on Thursday it may
soon strip heavily indebted Puerto Rico of its investment grade
credit rating, threatening to tag the U.S. territory as the
largest municipal bond issuer to date to tumble into junk bond
A leading Wall Street credit ratings group, Fitch said it
had placed the Caribbean island's BBB-minus general obligation
bond rating on negative watch and expected to clarify the status
of its rating by the end of June.
Fitch and two other U.S. ratings agencies - Moody's and
Standard & Poor's - currently rate Puerto Rico's GO debt at the
bottom of the investment grade scale. Moody's and S&P also have
negative outlooks on Puerto Rico, which already sports the
lowest ratings of any state or U.S. territory.
A cut in Fitch's rating to junk would be widely felt in
America's $3.7 trillion municipal bond market, where Puerto
Rico's $70 billion of high yielding debt is held by many mutual
funds and other institutional investors.
Interest rates on Puerto Rico debt have shot up in recent
months amid worries about its finances and a sputtering economy,
which appears to be tumbling back into recession.
The cost to insure Puerto Rico debt against default has
rocketed recently in the credit default swaps market.
On Thursday, a contract to insure $100 million of Puerto
Rico bonds for five years closed at about 799 basis points, not
far below a record high of 816 basis points in late October,
plus an upfront cost of 20.4 percent of the insured amount.
That means it would cost about $2 million per quarter over
five years, plus a one-time payment upfront of $20.4 million, to
insure $100 million of the island's bonds.
Fitch said in a news release it worried that the island's
ability to issue bonds had become limited and weighed on the
government's overall liquidity, which the agency said could be
bolstered by the Government Development Bank of Puerto Rico.
Fitch said the negative ratings outlook also applied to
Puerto Rico Building Authority government facilities revenue
bonds guaranteed by the commonwealth, Puerto Rico Aqueduct and
Sewer Authority commonwealth guaranty revenue bonds and pension
funding debt issued by the Employees Retirement System of the
Commonwealth of Puerto Rico.
Fitch, which also affirmed its AA-minus and A-plus ratings
on $15.6 billion of Puerto Rico sales-tax bonds, praised
financial and pension reforms taken by the island's government,
but described as "challenging" the prospects of ending Puerto
Rico's chronic budget deficits in the next two fiscal years.
The island's government is benefiting from new tax hikes,
with tax revenues for September and October coming in stronger
than a year earlier, GDB Interim President José Pagán Beauchamp
said in a news release.
"Our administration continues 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 strengthening our credit profile, market access
and liquidity," he said.