* Pension overhaul proposal due in 30-60 days
* Moody's says pension bonds are often a red flag
* Quick changes needed, newly named officials say
By Michael Connor
Dec 17 Puerto Rico's incoming government aims to
roll out early in 2013 a proposed overhaul of the severely
underfunded retirement system for government workers that may
include selling pension obligation bonds.
David Chafey, a banking executive named last week as
chairman-designate of the Caribbean island's Government
Development Bank, told reporters on Monday the taxable bonds,
also known as POBs, may be a possible source of funds.
"We need to look at that as a real option," he said.
POBs have been mostly shunned in recent years by government
policymakers, with critics arguing that the possible savings and
extra earnings they can deliver often come with outsized
financial risks for governments.
In July, Standard & Poor's Ratings Services said it was
considering a ratings downgrade on $2.9 billion of Puerto Rico's
senior pension funding bonds because governments and other
employers may not keep up timely contributions.
Last week, another leading Wall Street ratings agency,
Moody's Investors Service, knocked Puerto Rico's overall credit
rating down to near-junk status and warned it was considering
Moody's decision affected $38 billion of outstanding debt
and was linked to Puerto Rico's weak economic outlook and
worries about the pension system.
After the downgrade, Puerto Rico's 30-year yield spread over
top-rated bonds in the municipal market widened in secondary
trading and closed on Friday at 258 basis points above an
AAA-rated 30-year issue, a record high for 2012, according to
Municipal Market Data.
The spread, which investors demand for riskier borrowers,
has widened steadily for the last year. Its yield stands at 160
basis points more than an AAA-rated issue a year ago.
PENSION BONDS A RED FLAG
In a recent research report, Moody's said that issuance of
pension obligation bonds can be negative for an issuer's credit
"If bond proceeds substitute for annual contributions to
pension plans or are used to pay pensioners, we consider it a
deficit borrowing and would view the financing as credit
negative," the rating agency said in its report on Dec. 11.
"Pension bonds are often a red flag associated with greater
rigidity of long-term obligations, failure to find sustainable
solutions to pension funding and a pattern of pushing costs off
into the future. For this reason, most pension bonds have, at
best, a neutral impact on our overall assessment of an issuer's
In a conference call with reporters, Chafey and Javier
Ferrer, the GDB's president-designate, described talks on
pensions as well underway but said most particular changes had
not been decided or presented to Governor-elect Alejandro Garcia
"We are looking at all potential options to address pension
reforms," Ferrer said. "We understand that time is of the
essence. Moreover, we also understand that it is time for
Chafey said proposals were expected within 30 to 60 days.
Moody's last week said it cut Puerto Rico's debt rating in
part because its analysts saw few growth drivers in the island's
long-moribund economy, a decline in population and unemployment
nearly double that of the mainland United States.