More than a year after warning about the possibility, Standard & Poor’s Ratings Services on Tuesday made good on its word and cut its rating of Puerto Rico’s general obligation debt to ‘BB+’ from ‘BBB-,’ pushing it to the highest junk level status.
The New York-based ratings agency also downgraded the Commonwealth’s appropriation secured debt and Employee Retirement System debt to ‘BB,’ as well as lowered various ratings on the Puerto Rico Highways and Transportation Authority to ‘BB+’ and the Development Bank (GDB) to ‘BB.’
However, S&P refrained from taking a rating action on sales tax-secured debt of the Puerto Rico Sales Tax Financing Corp. (COFINA), but retained its negative outlook on its COFINA ratings
All of its ratings remain on CreditWatch with negative implications, the agency said in a report issued late in the day.
“The downgrades follow our evaluation of liquidity for the Commonwealth, including what we believe is a reduced capacity to access liquidity GDB,” S&P said. “We also believe that the Commonwealth’s access to liquidity either through GDB or other means will remain constrained in the medium term, even in the event of a potential issuance of debt planned next month.”
“The Commonwealth’s constrained access to the market, as well as our assessment of the size and timing of potential additional contingent liquidity needs,” S&P said.
Despite its decision, S&P said the island’s rating was not lowered further due to “the progress the current administration has made in reducing operating deficits, and what we view as recent success with reform of the public employee and teacher pension systems, which had been elusive in recent years.”
“We view the reform as significant and could contribute to a sustainable path to fiscal stability. We view the current administration’s recently announced intent to further reduce appropriations in fiscal 2014 by $170 million and budget for balanced operations in fiscal 2015 as potentially leading to credit improvement in the long run, but subject to near-term implementation risk that could lead to further liquidity pressure to the extent deficits continued,” the report stated.
“We also note the sustained commitment through a range of financial and economic cycles to funding debt obligations and providing what we view as strong bondholder security provisions,” S&P said.
The ratings could be further lowered if the government is unable to raise funding in the next few months or to otherwise improve cash flows, S&P said, adding it expects to resolve or address the CreditWatch within the next couple of months.S&P is the first credit ratings agency to slash Puerto Rico’s credit to junk. Moody’s and Fitch could follow. (Credit: Wikipedia)
Almost immediately after the S&P went public with its decision, Gov. Alejandro García-Padilla held a news conference to respond and defend his administration’s efforts to avoid the downgrade.
“This determination is the result of irresponsible fiscal decisions made based on the island’s credit. Decades of fiscal irresponsibility are not reversed in 12 months,” he said. “My administration may not be responsible for this degradation, but I’m making it my responsibility to pull the island out of it.”
While he refrained from offering concrete details of the steps the government will take to turn things around, García-Padilla said his administration will uphold its strategy to create jobs and spur economic development.
Furthermore, he said he will present today several legislative bills to reduce the current deficit by $170 million. No details on what those measures will be were offered. He also instructed his economic team to speed up the preparation of the next budget, which he said will close the government’s structural deficit for the “first time in decades.”
Meanwhile, Treasury Secretary Melba Acosta-Febo and GDB Chairman David H. Chafey said while disappointed with Standard & Poor’s decision, “we remain committed to the implementation of our fiscal and economic development plans.”
“We appreciate that S&P recognizes the Commonwealth’s significant efforts to date to tackle long-term structural issues, demonstrated by our significant pension reform, increasing the independence of a number of public corporations, and recent revenue increases,” they said in a joint statement.
“S&P also noted that the administration’s recently announced intention to reduce the current year deficit and plan for a balanced budget for Fiscal 2015, one year earlier than originally planned, will potentially lead to long run credit improvement.”
During the news conference, Chafey said the GDB has the capacity to cover two major debt payments coming up — $575 million in 90 days and $375 million in less than six months — and liquidity through at least the end of the current fiscal year on June 30.
“We are confident that we have the liquidity on hand to satisfy all liquidity needs until the end of the fiscal year, including any cash needs resulting from today’s decision,” Chafey said.
“In addition, the GDB and the Commonwealth of Puerto Rico have been in discussions with parties that have expressed an interest in arranging additional liquidity for the Commonwealth, and the Commonwealth continues to explore such options, including obtaining additional funding, as necessary,” Acosta-Febo added.
The GDB, Treasury and the Office of Management and Budget will hold a joint webcast on Feb. 12 to discuss the immediate impact of the downgrade and the Commonwealth’s fiscal and economic plans and progress, and to update investors on its financing plans.
However, there’s no word yet on when the GDB will release its financial statements to confirm whether has the liquidity it claims to have.Resident Commissioner Pedro Pierluisi
Pierluisi: ‘We must unite to move Puerto Rico forward’
In a statement, Resident Commissioner Pedro Pierluisi acknowledged the gravity of the downgrade, saying it will have “serious repercussions on our economy and government finances and it is essential that all of us in positions of leadership, whether in government, the private and business sector, academia and the political class, join forces to move Puerto Rico forward.”
“It’s time to grow as a people, to seek the common good and to transform Puerto Rico. We need to reform our government and revive our economy,” he said. “We have to leave behind what has not worked and change our course.”
“Instead of feeling sorry for ourselves, we must act. We must recognize that this administration’s fiscal and economic policies of have not worked. The government should not spend a dollar more than it receives, and should promote, rather than punish, the private sector as the engine of our economy. We have to do it. Now there is no alternative,” he said.
It remains to be seen whether Pierluisi, president of the New Progressive Party, will cross party lines to work directly with García-Padilla, who heads the opposing Popular Democratic Party, to solve the island’s fiscal problems dating back well over 40 years.
To access S&P’s full report, click HERE.