Fitch Ratings announced Thursday it has downgraded the Commonwealth of Puerto Rico’s general obligation and related debt ratings to ‘B’ from ‘BB-‘ and placed them on Rating Watch Negative.
With the action, Fitch downgraded $13 billion in Commonwealth GO bonds, to ‘B’ from ‘BB-‘; $6.7 billion in Puerto Rico Sales Tax Financing Corporation (known as COFINA for its initials in Spanish) senior lien sales tax revenue bonds; and $8.5 billion in COFINA first subordinate lien sales tax revenue bonds, downgraded to ‘B’ from ‘BB-‘
Fitch’s action on the GO rating results in a downgrade of the Puerto Rico Aqueduct and Sewer Authority senior lien revenue bonds to ‘B’ from ‘B+’ and maintained on Negative Watch. However, it does not affect its ratings on debt of the Puerto Rico Electric Power Authority, rated ‘CC’.
“The downgrade and Negative Watch reflect elevated concerns regarding both the ability of the Commonwealth to execute a financing to bolster the liquidity cushion of the Government Development Bank, and thereby that of the Commonwealth, and the willingness to pay on the part of the legislature,” Fitch said.
“These issues are clearly related, as Fitch believes that recent statements and actions by the legislature that would result in an abrogation of the Commonwealth’s commitments to general government bondholders have increased the challenges to a successful Puerto Rico Infrastructure Finance Authority financing and, at a minimum, are likely to result in an increase in already elevated borrowing costs,” the agency further noted.
In its assessment, Fitch said the risk of the government failing to execute a financing to bolster liquidity in the near term has increased in recent months.
“The financing was delayed due to challenges in securing workable legislative authorization. More recently there has been mounting concern about the legislature’s support of general government bondholder security; there are now two different proposals in the legislature that would materially negatively affect bondholder interests,” it said.
On Thursday, lawmakers took exception to Fitch’s comments, with Senate President Eduardo Bhatia saying, “Fitch has to do what it believes and the legislature has done and will do what it has to do for the good of the people of Puerto Rico and its finances.”
“I think it’s malpractice to reach speculative conclusions without having made a serious analysis of legislation under evaluation,” he said. “Today, all approved legislative measures and those under consideration in the Senate are responsible with with the island and with creditors. The Senate will do what it must do and will do what is right for Puerto Rico.”
Meanwhile, Popular Democratic Party Reps. Manuel Natal, Luis Raul Torres and Luis Vega-Ramos issued a joint statement saying that two weeks ago, they had submitted a proposal to consult a possible amendment to the Puerto Rico Constitution to pave the way for establishing mechanisms to be able to renegotiate all or part of the current public debt.
They blasted Fitch by saying its “censorship” of the democratic debate to seek alternatives is “unprecedented and unacceptable.”
“The democratic discussion about Puerto Rico’s general well-being cannot be subjected to promises of more favorable treatment by credit ratings agencies,” the lawmakers said.
The trio also said Fitch contradicted itself in its report, because by downgrading the credit they concluded that Puerto Rico is capable of continuing to pay its public debt without restructuring. However, the agency also concluded that without additional liquidity from the GDB, there is no capacity to make those payments.
“The reality is that we have taken a series of measures to address Puerto Rico’s fiscal situation, and what remains to be resolved is the realistic management of public debt,” the lawmakers said. “That discussion, if it is serious, is good for us debtors, but is also good for creditors who will be able to have certainty in a reasonable repayment structure.”
Minority House Speaker Jennifer González, of the opposing New Progressive Party, said the new credit downgrade “reaffirms market distrust in the current administration.”
“Fitch once again downgraded our bonds, which were already below junk status. The report clearly states the lack of will to meet obligations, especially in the Legislature, making direct reference to what the PDP proposes of amending the Constitution to not pay bondholders, which would further affect the little credibility this administration has left in the markets.”
To reach the full Fitch report, click HERE.