January 25, 2014 / 3:50 AM / 6 years ago

S&P puts Puerto Rico's ratings on watch for downgrade

NEW YORK, Jan 24 - Standard & Poor’s said it was putting Puerto Rico’s debt on watch for a possible downgrade on Friday, the latest threat faced by the U.S. territory that has been subject to significant financial stress due to heavy pension obligations and a weak economy.

The move follows S&P’s decision Friday to put the Government Development Bank of Puerto Rico on watch “with negative implications,” increasing the chances of a downgrade. Puerto Rico’s general obligation and appropriation debt ratings are on watch for a possible downgrade, along with several other ratings, including the territory’s employee retirement system.

The move reflects a view that the commonwealth has become too reliant on its Government Development Bank, which could have limited liquidity by its fiscal year-end of June 30, 2014.

S&P’s rating for Puerto Rico is currently triple-B-minus, the lowest possible investment-grade rating. Two other ratings agencies, Fitch and Moody’s, also already have the lowest possible investment-grade rating for the island. Downgrades to junk could trigger accelerated debt repayments and demands for more collateral for interest-rate swap contracts. Because it is not a U.S. state or municipality, but a territory, Puerto Rico does not have the option to seek a debt restructuring under bankruptcy protection, as the city of Detroit did last year.

In a statement, Government Development Bank for Puerto Rico (GDB) interim President José Pagán Beauchamp said the GDB and the commonwealth “are comfortable with current liquidity levels and have a variety of options for raising additional liquidity, including a planned return to the public debt markets in the near term. S&P is correct in noting that Puerto Rico’s constitution guarantees the payment of GO debt, and Puerto Rico will continue to do everything necessary to honor all of its commitments.”

Puerto Rico, battling population decline, chronic recession and perennial budget shortfalls, is under pressure to show it can access the bond market after delaying a debt sale late last year and promising to bring a deal to market by late February. Puerto Rico has about $55 billion of tax-supported debt and another $15 billion supported by other revenue streams, such as water and power rates.

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