June 30, 2015 / 5:35 AM / 5 years ago

UPDATE 2-S&P cuts Puerto Rico rating, says default seems inevitable

(Adds background, details on S&P, Moody’s and Fitch ratings)

June 30 (Reuters) - Standard & Poor’s Ratings Services lowered its credit rating on Puerto Rico to ‘CCC-minus’ from ‘CCC-plus’, hours after Governor Alejandro Garcia Padilla said the U.S. territory needed a period of bankruptcy to restructure its debt.

A default, distressed exchange, or redemption of Puerto Rico's debt within the next six months seems inevitable, S&P said in a statement. It put a negative outlook on the rating. (bit.ly/1GLPCyD)

Puerto Rico faces a July 1 deadline to repay $1.055 billion and prepare an annual budget. Earlier Monday, Fitch Ratings downgraded Puerto Rico, while Moody’s said its current ratings already allowed for a high probability of default.

Former IMF staffers — engaged by Government Development Bank, Puerto Rico’s financing arm — issued a damning report on Sunday about the U.S. territory’s financial stability.

Garcia Padilla admitted on Monday that Puerto Rico’s budget gap was bigger than thought and it could not repay its $73 billion of debt, while a newly appointed adviser to the U.S. territory said it is “insolvent” and will soon run out of cash.

S&P said it placed all of Puerto Rico’s debt at the same ‘CCC-minus’ level, including that for the Municipal Finance Agency and the Employees Retirement System, as all these obligations were potentially at risk of being restructured due to the severity of the territory’s fiscal situation.

“We believe the (Puerto Rico) commonwealth’s very weak liquidity and difficulty in obtaining external market access for cash flow financing raises the likelihood of a debt restructuring within the next six months,” S&P said.

Fitch downgraded Puerto Rico’s debt ratings to ‘CC’ from ‘B’ with a rating watch negative, saying a default of some kind appeared probable.

Moody’s Investor Service said its ratings on Puerto Rico’s debt range from ‘Caa2-negative’ to ‘Ca-negative’ and are consistent with a high probability of default.

By Wednesday, Puerto Rico needs to agree a budget, make a $655 million payment on its general obligation debt and PREPA, its struggling utility, needs to pay $400 million.

Garcia Padilla asked Washington to allow the U.S. territory to file for bankruptcy, saying his goal was to come up with a negotiated moratorium with bondholders to postpone debt payments for a number of years.

S&P said its negative outlook reflects at least a one-in-three chance that it could lower Puerto Rico’s rating if it said it may miss a debt service payment or planned to restructure in any way that the rating agency classifies as distressed.

Shares of banks and bond insurers exposed to Puerto Rico, such as MBIA Inc and Assured Guaranty Ltd, plummeted on Monday due to growing fears that the U.S. territory would default, and options activity on many of those shares hinted at further declines. (Reporting by Supriya Kurane in Bengaluru; Editing by Anupama Dwivedi and Savio D’Souza)

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