Moody’s removes ‘provisional’ designation after GO sale
Moody’s Investors Service, the first of the trio of ratings agencies that a month ago slashed Puerto Rico’s credit to junk, on Tuesday removed the “provisional” designation from the Ba2 rating assigned to the Commonwealth’s issuance of $3.5 billion 2014 A General Obligation Bonds priced earlier in the day.
The outlook remains negative, Moody’s said.
“The Ba2 rating was contingent on our assessment of legislation and bond documents for potential inclusion of atypical terms and conditions, as well as completion of the transaction and the amount of proceeds,” Moody’s noted.
“After our review of available documents and legislation, we believe that the transaction provides for New York legal jurisdiction in the event of litigation related to the bonds. The sale of $3.5 billion has priced and is expected to close next week,” the agency added.
In its rationale, Moody’s said supporting the Ba2 rating is the fact that Puerto Rico’s current administration has taken notable steps to rein in debt and spending, to reform the retirement systems, and to promote economic growth.
“The Ba2 rating also incorporates our belief that the commonwealth would successfully raise enough cash in this financing to maintain an adequate liquidity profile through the end of fiscal 2015,” the agency noted.
“The Ba2 rating and negative outlook are also based on chronic deficit financing, pension underfunding, and budgetary imbalance, along with seven years of economic recession and uncertain prospects for future economic growth,” Moody’s further noted. “These factors, over a long period, have driven up Puerto Rico’s debt and fixed costs, narrowed its liquidity, and hampered its bond-market access. Puerto Rico faces years of difficult decisions, as its debt and pension costs climb.”
Moody’s said it does not expect the rating to go up in the near term.
The agency’s decision came a few hours after the Government Development Bank priced $3.5 billion worth of tax-exempt fixed rate General Obligation Commonwealth bonds, which mature in 2035 and were issued at an 8.00% coupon, and an 8.727% yield.
The Commonwealth will receive approximately $3.2 billion in net proceeds from the offering, approximately $900 million of which will be used to refinance short-term obligations and swap termination payments, and approximately $400 million of which will be used to capitalize interest.
The repayment of all outstanding variable rate debt of the Commonwealth (other than $126 million in outstanding CPI bonds) greatly simplifies the Commonwealth’s capital structure and reduces market and credit risk.
During a mid-afternoon news conference, Gov. Alejandro García-Padilla expressed his “satisfaction” with the transaction’s success, which he said will shore up money needed to “more effectively boost the economic development strategies to improve the quality of life for all Puerto Ricans.”
The successful placement, he said, delivers a “clear message about the trust investors have on the administration’s plan to address the fiscal situation. It also showed transparency and the clarity with which the transaction was handled.”
While so far García-Padilla and his economic team have remained mum on the concrete steps they will take to get the economy back on track, he said in coming weeks more information will be forthcoming on how the government will keep its expenses in check and in line with revenue collections.