| NEW YORK
NEW YORK Feb 5 Puerto Rico will face trouble
selling bonds after Standard & Poor's cut its credit rating to
junk status, spelling possible trouble for the cash-strapped
U.S. territory as it tries to push ahead with debt deals worth
as much as $2 billion, some big institutional investors said on
Popular because of its triple tax-free status, Puerto Rico's
outstanding debt totals $70 billion, or nearly four times the
$18 billion owed by bankrupt Detroit. Some 70 percent of mutual
funds dedicated to tax-free bonds own Puerto Rico bonds,
according to Morningstar.
But the ratings cut by S&P, which came in the closing
minutes of trading on Tuesday, could sap investor interest,
despite the high yields offered by Puerto Rican bonds.
"The island will need to borrow relatively soon to meet its
obligations, and it may well find it difficult or impossible to
access the market for financing," said Peter Hayes, head of
BlackRock's Municipal Bonds Group.
Puerto Rico officials said after the ratings cut, which
opens the government to as much as $940 million in penalties
tied to swaps and other securities, that they are studying
financing options and instituting cost savings.
In San Juan, Puerto Rican Governor Alejandro García Padilla
said on Wednesday he would seek to renegotiate swaps agreements
and other loans that will require accelerated payments.
The island last sold bonds in August and has, according to
sources, considered a possible $2 billion financing by
institutional investors organized by Morgan Stanley, bond deals
and loans by banks on the island.
The downgrade "calls into question whether they'll be able
to bring those offerings to the market," said Dan Heckman,
senior fixed income strategist at U.S. Bank Wealth Management.
"It just continues to drive their interest expense higher and
Some of Puerto Rico's bond yields now top 10 percent in
Puerto Rico is not likely to get much help from Washington;
the White House reiterated on Wednesday that it was not
considering a bailout for the cash-strapped commonwealth.
Bill Delahunty, director of municipal bond research at
Eaton Vance Corp, said there are many questions that still need
to be answered before Puerto Rico can come to market. For
example, investors will key on the bonds' interest rates and
credit ratings before deciding if they will be buyers.
Likely buyers were high-yield funds with little or no
current exposure and hedge funds, Delahunty said. He declined to
discuss his firm's investment strategy, but said that mutual
funds and other traditional buyers were unlikely to be able to
absorb all of the bonds.
Lyle Fitterer, municipal bond fund manager at Wells Capital
Management, said he would be reluctant to participate in a bond
sale if and when Puerto Rico comes to market.
"At the general obligation (GO) basis we would not unless
there is some sort of specific revenue pledge that would come
with the structure or some security package that would go above
and beyond the GO pledge and assign some sort of ... tax."
Even so, he said that investors who were inclined to buy new
Puerto Rico debt would be little influenced by S&P's downgrade.
"Most people consider it to be a non-investment grade
credit, and I think at this point, if you're buying it, you
better be putting it in a place that takes non-investment grade
risk," Fitterer said.
A big investor in Puerto Rico that now looks like an
unlikely buyer of the commonwealth's debt would be the Franklin
Double-Tax Free Income Fund, run by Franklin Resources
Inc. Last year, the fund's exposure to Puerto Rico
topped 60 percent, according to Lipper Inc data.
Since the end of July 2012, the fund's net assets have
shrunk to $363 million from nearly $900 million. Franklin
Resources was not available for comment.
S&P's rating announcement, which may be followed by similar
downgrades by Moody's Investor Service and Fitch Ratings, had
muted and mixed effects on Puerto Rico bond prices Wednesday
despite fears of heavy selling on a downgrade.
"Puerto Rico's bonds have been already trading in distressed
territory since August 2013," Citigroup Markets analysts said in
a commentary. "The downgrade seemed to have been largely priced