Fitch Ratings placed the ‘BBB-‘ ratings of the Commonwealth of Puerto Rico’s general obligation (GO) bonds, the Puerto Rico Building Authority government facilities revenue bonds guaranteed by the commonwealth, the Puerto Rico Aqueduct and Sewer Authority’s commonwealth guaranty revenue bonds, and the Employees Retirement System’s pension funding bonds on negative watch Thursday.
In its assessment, the credit ratings agency recognized the “significant progress” made by the government in addressing several of its credit challenges and “believes the commitment of management to achieving fiscal balance and honoring its commitments to bondholders remains strong.”
However, its decision to place the mentioned debt under “Rating Watch Negative” “reflects the challenge being faced by the commonwealth in maintaining its financial flexibility in light of unexpected deterioration in its capital market access,” Fitch said. Fitch believes the commonwealth’s liquidity through GDB is adequate to address fiscal 2014 financing needs; however, reliable market access in line with market norms is important to the long-term stability of the rating.
GO bonds are a full faith and credit obligation of the Commonwealth that benefit from a constitutional first claim on public revenues. The ratings on the PBA and PRASA bonds “reflect the guaranty of the commonwealth’s full faith, credit, and taxing power,” Fitch added.
Fitch recognized the government’s liquidity levels, saying the Government Development Bank can provide it if there is insufficient access to other liquidity resources; “however, doing so would leave the commonwealth with reduced remaining flexibility.” At present, the commonwealth has $1.46 billion in combined near-term maturities and financing needs for the current fiscal year.
While the agency credited the government for taking steps toward closing a large budget gap, structural budget balance has not yet been reached despite several years of fiscal restructuring measures.
“The commonwealth has made significant progress in reducing the deficit from 47 percent of general fund revenues in fiscal 2009 to an estimated 8.6 percent in fiscal 2014. Fitch believes meeting the goal of structural balance over the course of the next two fiscal years will remain challenging,” the agency said.
“Longer-term structural budget balance and island stability require sustained real economic growth. Initial signs of recovery from the long local recession appear to have been more a reflection of economic stimulus than underlying growth and recent economic performance has been weak,” Fitch further noted.
Fitch expects to resolve the “Rating Watch Negative” by the end of the current fiscal year, taking into account ongoing issues related to the commonwealth economy and budget performance, but also the manner in which the commonwealth addresses its liquidity needs, it said.
Fitch downgraded Puerto Rico’s GO debt rating to ‘BBB-‘ with a Negative Outlook on March 20, 2013.
COFINA ratings hold steady
On Thursday, Fitch also affirmed the ratings of the Puerto Rico Sales Tax Financing Corporation (known as COFINA in Spanish) bonds as follows: $6.7 billion senior lien sales tax revenue bonds at ‘AA-‘; $8.9 billion first subordinate lien sales tax revenue bonds at ‘A+’. The Rating Outlook for both the senior and subordinate lien bonds is Stable.
“We’re pleased that Fitch has reaffirmed its ratings on the senior lien and first subordinate lien COFINA bonds, citing a diverse and expanded revenue base, strong annual coverage and strong legal separation from Commonwealth operations,” said GDB Interim President José V. Pagán.
“With regard to the Commonwealth’s GO bonds, Fitch’s report noted that GO bonds have a first claim on the Commonwealth’s revenues, that we have taken significant steps towards fiscal balance, and that we have mitigated near-term liquidity risk,” he said.
“Tax revenues for September and October are strong on a year-over-year basis, demonstrating that actions Puerto Rico has taken to increase revenues are working well,” he said, noting that the Treasury Department “is continuing to make progress on its initiatives to increase the capture rate and reduce tax evasion regarding the remittance of the Sales and Use Tax, and today announced additional measures to ensure that collection efforts will be reinforced from all angles.”
“Our 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,” he said.