Credit ratings agency Fitch Ratings said Wednesday it believes that there are significant challenges ahead for Puerto Rico as it pursues initiatives necessary to maintain a credit profile commensurate with its ‘BB-‘ general obligation junk rating.
“The next few months will be critical. Improving the Government Development Bank’s liquidity cushion, and therefore that of the commonwealth, is a key consideration. Fitch will look for a sizeable financing to be successfully brought to market,” the agency said.
“Fitch will closely follow revenue and spending performance in fiscal 2015 and the progress of the governor’s new tax reform proposal and upcoming budget for fiscal 2016; failure to show continued progress toward structural balance would pressure the rating,” it further noted.
In a statement, the credit ratings agency said it will keep a close eye on signs of any shifts in political and/or public sentiment that plays against the interests of bondholders.
“In recent months the administration has struggled to secure workable legislative authorization for a refinancing of highway authority debt. The refinancing would provide needed liquidity for GDB. Fitch has also noted discussion in the media advocating broad debt restructuring. To the extent this proves to be a sign of deteriorating support for measures supportive of credit quality, it is negative for the commonwealth’s general obligation and related credits,” the agency said.
“Fitch continues to believe that the ultimate success of efforts to put the commonwealth’s finances on a sustainable path will be driven by the performance of the economy; however, in the near term Fitch judges the execution risks discussed above to be the more immediate concern,” the agency further added.
The negative outlook that Fitch assigned to the government’s junk ‘BB-‘ rating in July 2014 reflects both continued economic weakness and the significant implementation risks to achieving budget balance, it said.
Still it acknowledged that last week’s federal court ruling that found this summer’s restructuring law unconstitutional has no effect on its ratings of the Puerto Rico Electric Power Authority, the Puerto Rico Aqueduct and Sewer Authority, or the commonwealth’s general credit.
GDB liquidity strained by financing delay
In its assessment, Fitch noted the GDB’s dwindling liquidity, requiring an infusion of cash that is important to the stability of both the bank and the commonwealth.
“As the GDB currently has sizable loans outstanding to the Highways and Transportation Authority, a refinancing of this debt would meaningfully bolster liquidity. To this end, last month the governor signed legislation that increases petroleum taxes to support a Puerto Rico Infrastructure Finance Authority (PRIFA) financing of up to $2.95 billion that would be used, in part, to pay off the highway authority loans at GDB,” Fitch said.
However, it said the Legislature’s delay in approving the package and the cap on borrowing — which was eliminated this week — “raised concerns” because the GDB’s liquidity serves a financial cushion for the Commonwealth’s general fund and influences Fitch’s opinion of credit quality. The government is still on standby for the bond sale.
“Fitch has recognized the repeatedly demonstrated focus of the current administration on bolstering the fundamentals of its general credit, and the legislature has consistently approved very difficult measures in recent years, including pension reform and budget balancing on the revenue and spending side of the equation. However, challenges in recent months suggest a higher level of pushback from the legislature is a possibility going forward,” Fitch said.