Almost exactly a year to the day when Moody’s Investors Service cut Puerto Rico’s credit to Baa3, the New York-based agency placed the island’s general obligation rating on review for downgrade.
At the same time, ratings that are capped by or linked to the commonwealth’s G.O. rating were also placed on review, including the Puerto Rico Sales Tax Financing Corporation’s (COFINA’s) senior and junior lien bonds. Approximately $52 billion of rated debt is affected.
In its rationale, Moody’s said the action is based on the commonwealth’s “weakening liquidity, increasing reliance on external short-term debt, and constrained market access, within the context of a weakened and now sluggish economy.”
“These developments exacerbate the longstanding financial strain brought by the commonwealth’s very high debt load and pension obligations, as well as its chronic budget deficits,” the agency said.
During the review period, Moody’s will focus on the following:
- The ability and willingness of the commonwealth to access the long-term capital markets;
- Key economic indicators, including employment data, retail sales and the island’s Economic Activity Index;
- Financial performance in coming months, including key December revenues;
- Legislative actions to reform the Teachers’ Retirement System (TRS), shore up liquidity, or take any other actions to preserve fiscal stability; and
- The proposed budget for fiscal year 2015.
The review could result in either confirmation of current rating levels or a downgrade to junk status. A downgrade would be increasingly likely if during Moody’s review, Puerto Rico failed to access the public debt market with a long-term borrowing, showed declines in liquidity, had financial underperformance in coming months, produced economic indicators in coming months that point to a further downturn in the economy, and inability by the government to achieve the needed reform of the TRS.
Moody’s late afternoon announcement drew immediate reaction from administration officials.
Treasury Secretary Melba Acosta Febo and Government Development Bank Chairman David H. Chafey issued a joint statement saying:
“While Moody’s has placed our general obligation and related bonds on review, we are pleased that they have identified that economic indicators may point to the start of economic stabilization for the Commonwealth. We are further encouraged that Moody’s recognized our growing labor force, our economic plan focused on job creation, and the strength of fiscal 2014 revenue growth in the general fund through October.
“The administration continues its focus on creating sustainable economic growth through job creation, making ongoing progress towards our goal of a structural budget balance by fiscal 2016, and strengthening our credit profile, market access and liquidity,” they said.
Meanwhile, Gov. Alejandro García-Padilla said: “I’m convinced that our government initiatives have demonstrated, through the recent signs of emerging growth in our economy, that we are at the beginning of the economic stabilization we wanted, and that accrediting agency Moody’s recognized today.”
“Contrary to the worst predictions, Moody’s issued a report recognizing that while the economy is weak, there are engines driving an emerging growth and agrees that the proceeds from these first months of fiscal year 2014 have been ‘good’. I am pleased that this reality is recognized,” he said.