20 December 2012

Puerto Rico leaders disagree with downgrade

By Caribbean Business Online Staff

Moody’s downgrades PR; one notch above ‘junk’

Puerto Rico officials are voicing disagreement with Moody’s Investors Service over its downgrade of the commonwealth government’s general obligation (GO) bonds to just one notch above “junk” grade.

The cut from Baa1 to Baa3 on Thursday kept the GOs above the non-investment level. Falling into that category would block Puerto Rico’s access to the bond markets and send the costs of borrowing skyrocketing. The outlook remains negative, Moody’s said.

Moody’s acknowledged progress on Puerto Rico’s fiscal and economic fronts but said it wasn’t enough. The rating agency cited concerns over the government’s ability to control spending and fix the ailing pension system in the near future.

Incoming Gov-elect Alejandro García Padilla said “Puerto Rico is an 'A' place,” referring to the top grade given to debt issuers by the credit rating agencies.

“I want Puerto Rico to know that Puerto Rico is an A place regardless of what grade the credit raters give us,” he said

The Popular Democratic Party leader pledged to present his fiscal and economic plan to credit raters at the “right time.” He said the “serious measures” would include spending controls, strategies to jumpstart the economy and some “unexpected” initiatives.

The $3.7 trillion U.S. municipal bond market has been keeping a wary eye on Puerto Rico’s fiscal course after last month’s election ushered in García Padilla and ousted the incumbent Gov. Luis Fortuño, who had earned credit on Wall Street for tough decisions.

“We don’t agree with Moody’s did, but they have the right to do it,” Fortuño said.

The New Progressive Party governor noted that Moody’s had raised Puerto Rico’s rating in 2010, before dropping it back down to a level not seen since 2008.

Moody’s, through an institutionwide recalibration in April 2010, increased its ratings to A3, a full three notches above junk territory, but had since downgraded the rating on Puerto Rico’s GO bonds to Baa1 before lowering it another two notches on Thursday.

“Two of three credit rating agencies haven’t changed their classifications, which are higher than they were when we took over four years ago,” Fortuño said.

S&P increased its rating on Puerto Rico to BBB, two notches above junk-bond status, from BBB-minus in 2011. It now says there is a one-in-three chance it will downgrade the rating by early mid-2013 if action isn’t taken on the pension problem. That would leave the rating at BBB-minus, a single notch above junk-bond status and exactly what the credit was rated when the current administration took office.

Fitch Ratings, a unit of Fimalac SA of Paris, whose system tracks closely with S&P’s, first began to rate Puerto Rico this term, giving GOs a BBB-plus ranking. That is currently the island’s best ranking, a full three notches above noninvestment grade.

Outgoing Government Development Bank President Juan Carlos Batlle ripped the Moody’s downgrade.

“Obviously we aren’t pleased by Moody’s move. The incoming administration should have been given time present its fiscal team and plan to address these issues,” he said.

The GDB chief noted that the downgrade came just two days after García Padilla designated his whole fiscal-economic team.

“I know them and they are very competent,” Batlle said.

The GDB also disagreed with Moody’s interpretation on “many aspects” of the government’s current fiscal situation.

“The way this came down doesn’t sit well with me and I told them so,” Batlle said.

“But the report essentially validates what we have been saying for months,” he said. “First, that we have made considerable progress over the past several years. Second, that more needs to be done. And third, that there is no time to lose.”

Fortuño had assured credit-ratings agencies last week that García Padilla has a “good understanding” of the fiscal challenges facing Puerto Rico, and urged them to give him time to put together a full economic team and present a financial improvement plan.

The governor talked to Standard & Poor’s (S&P), Moody’s and Fitch Ratings, the three credit-rating agencies that rate Puerto Rico bonds.

The governor sat down with García Padilla about a week after the election for an “open and frank” discussion of Puerto Rico’s fiscal challenges, and he discussed the meeting with the Wall Street bond analysts.

“My feeling is that García Padilla and his advisers have a good understanding of what the real challenges are,” the governor said.

García Padilla had already written to credit-ratings agencies pledging his commitment to address the island’s fiscal challenges.

Wall Street wants the Puerto Rico government to return to complete structurally balanced budgets in fiscal year 2014, which begins July 1, 2013, and to take additional steps to strengthen the finances of Puerto Rico’s public-worker pension funds, bond investors and credit-rating analysts have told CARIBBEAN BUSINESS.