Downgrade to have limited impact on Puerto Rico co-ops

Written by  //  February 17, 2014  //  Banking, Financial District  //  1 Comment

Daniel Rodríguez-Collazo

Daniel Rodríguez-Collazo

Puerto Rico’s co-op sector is expected to experience a “reduced impact” as a result of last week’s triple downgrade of Puerto Rico’s credit to junk by U.S. ratings agencies, the head of the Corporation for the Supervision and Insurance of Puerto Rico Cooperatives, known as COSSEC in Spanish, said.

“On numerous occasions you have heard me say how the co-op sector has proven to be a cornerstone for our island’s economic development,” said COSSEC President Daniel Rodríguez-Collazo. “Moreover, as it has over the past decade, [the sector] has demonstrated unprecedented firmness and strength, even in times of great economic slowdown.”

“The reality is that the strength in the co-op movement has never been more evident than in recent times. So much so that recently, island co-ops made a historic contribution to economic development by financing a large portion of government debt by buying local bonds, which represented a more than $1.3 billion investment,” he said.

However, he said the transaction was not signed without taking the proper precautions and establishing adequate guarantees to avoid losses.

“It’s important to note that the value of a bond varies constantly and is ruled by the market. At this time, the market has determined that Puerto Rico bonds have a lower value than originally determined,” he said. “However, because the downgrade is the product and reflection of the liquidity we have as an island, its effect on various economic sectors also depends on the evaluation and liquidity of each sector.”

“In our assessment, co-ops have excess liquidity, so we’re confident that the downgrade will not affect this industry directly. The loss at this moment in time represents an unrealized loss for co-ops, or for accounting purposes,” Rodríguez-Collazo said.

As long as local co-ops hold on to their bonds, they will receive full parity once they mature because even those affected by the downgrade will bounce back to 100 percent par value once their term is up. Furthermore, most co-ops invested in General Obligation bonds, as well as on Puerto Rico Sales Tax Financing Corp. (known as COFINA in Spanish) bonds, which are guaranteed by the Puerto Rico constitution and by sales and use tax collections.

“The only way they could register a real loss is if a financial institution decides to sell its portfolio of Puerto Rico bonds today, since they would have to sell it at a value below its original value. This would make the unrealized loss a real loss,” he said. “Only in that circumstance would there be a negative impact on their finances.”

However, he said there is likely little chance that co-ops would make such a move, given that the sector has excess liquidity “to the point that we are working so that they can channel this excess investment into other instrumentalities.”

According to COSSEC, notes that mature this fiscal year represent about $77.5 million. The entity is already working with the Government Development Bank to guarantee a payment source, Rodríguez-Collazo said.

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One Comment on "Downgrade to have limited impact on Puerto Rico co-ops"

  1. Kenneth McClintock February 17, 2014 at 9:39 AM · Reply

    The timing of that $1.3 billion buy seems strange. Were decisionmakers looking out for the coops interest they are sworn to uphold, or the “public” interest? It sounds like they’re masking a $600 million-plus unrealized loss, unless a co-op holds on to the bond for 15- 20- years until full redemption. I’m all for buying PR bonds, but at the lowest price/highest yield the market has to offer.

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