Puerto Rico came under increased pressure to issue bonds in coming months to prove it can still access capital, as Moody's Investors Service put $52 billion of the island's debt under review for a downgrade to junk status.
Moody's late Wednesday placed all Puerto Rico bond ratings except for those of the Puerto Rico Electric Power Authority and the University of Puerto Rico under review, listing failure to access the public debt markets and declines in liquidy among five factors that could trigger a downgrade. Fitch Ratings last month put Puerto Rico's general obligation BBB-minus rating under review, citing similar concerns over the commonwealth's ability to raise money.
The move by Moody's drew a response from Gov. Alejandro García Padilla, who pointed to gains in the island's economic index in the past two months and improvements in the government's fiscal position.
"I see with optimism the first signs, even if only incipient signs, that we are going towards economic stability," Garcia Padilla said. "The general fund revenues for this fiscal year surpass the budget estimates and we're still advancing at a steady pace."
Moody's currently rates Puerto Rico's general obligation bonds and nine other public sector bonds and notes at Baa3. All of these ratings except for the one for PREPA's bonds have been put on review. Any further downgrade would push the ratings into a speculative or "junk" grade.
Moody's also placed the ratings for the Sales Tax Financing Corporation (COFINA) that are A2 for the senior lien bonds and A3 for the junior lien bonds on downgrade review. It placed the Baa2 rating of the Puerto Rico Highway and Transportation Authority highway revenue bonds on review, as well as the Ba1 rating of the Public Finance Corporation Commonwealth Appropriation bonds, Puerto Rico Aqueduct and Sewer Authority Revenue bonds, and Puerto Rico Highway and Transportation Authority subordinate transportation revenue bonds.
Moody's had affirmed these ratings on Oct. 3 and maintained a negative outlook. A negative outlook refers to a possibility of a downgrade over two years or so. A spokesman for Moody's said Thursday the review announced Wednesday should take 90 days or less. In mid-November Fitch Ratings put Puerto Rico's general obligation BBB-minus rating on negative watch, similar to Moody's negative review.
In its ratings update, Moody's lists five factors that could trigger a Puerto Rico's ratings downgrade: "failure to access the public debt market with a long-term borrowing, declines in liquidity, financial underperformance in coming months, economic indicators in coming months that point to a further downturn in the economy, [and] inability of government to achieve needed reform of the Teachers' Retirement System."
Fitch had said the high yields that market participants are demanding on Puerto Rico debt have pushed Puerto Rico to rely on short-term privately placed borrowings.
Both Fitch and Moody's are looking for Puerto Rico to sell bonds at reasonable rates. However, Fitch said it would resolve its watch by the end of June. Effectively, Moody's may have given Puerto Rico three months to sell bonds at what the rating company perceives to be a reasonable rate.
The timing of the review announcement fueled speculation by Municipal Market Advisors managing director Robert Donahue and Janney Capital Markets managing director Alan Schankel that it was triggered by Puerto Rico's decision to pay off a bond anticipation note with Barclays, rather than extend the note. By using $400 million of its own money, the Government Development Bank now has a smaller cushion to deal with future demands that it may need to cover in future months, Donahue said.
A person familiar with the matter said that Puerto Rico did not ask to extend the notes' maturity.
Moody's spokesman David Jacobson said the review could be attributed to several factors including recent rises in island unemployment, a negative revision to projected GNP growth, narrowing liquidity at the GDB, and the difficulty Puerto Rico is having accessing the bond market.
"The commonwealth has swaps and financings that include collateral and acceleration provisions in the event of a downgrade by any one of [the] three major credit rating agencies," Moody's analyst Lisa Heller said. "We estimate that a one notch downgrade could result in liquidity demands of up to $1 billion, an amount we believe can be covered by current liquidity, but would significantly narrow remaining net liquid assets."
Donahue said he has heard that other banks that have made short term lending to Puerto Rico or have offered lines of credit to it, are considering not renewing the notes or lines in the next few months.
The GDB says it has good liquidity, but it has not publicly released data on its financial condition and may not be in as good a shape as it says, Donahue said.
He said he's heard that GDB has been asking government authorities to move deposits from local Puerto Rico banks to the GDB, which would bebe evidence of unusual measures to deal with the bank's financial situation, he said.
Howard Sims senior credit analyst Richard Larkin said the ratings agencies have been downgrading Puerto Rico's bonds even as the commonwealth financial situation has been getting better. The Moody's review of Puerto Rico continues that trend, he said.
Larkin said he thought there was about a 50% chance that at least one of the ratings agencies would downgrade the island's GO debt to a speculative grade in the next several months.
However, a downgrade to a speculative grade won't lead mutual funds to flood the market with bonds, Larkin said. Most of the funds that would sell in this case have already sold, he said.
A downgrade would make things more difficult for Puerto Rico, but would not make it insolvent, Larkin said. Even if a downgrade to a speculative grade occurs, Larkin remains optimistic about Puerto Rico paying its debts and getting its financial house in order.
Schankel said he thought the December Economic Activity Index will be key to determining whether the ratings agencies will downgrade Puerto Rico. November has been positive for several years so will not be as indicative to them.
On Thursday Puerto Rico announced November net revenues that fell 9.1% short of the government's projections. Over the first five months of the fiscal year net revenues are still 2.6% above projections.
Schankel said the government has reasons to expect December revenues to be much larger than those for November. How these turn out will be much more important than what has happened with November revenues, he said.
"While Moody's has placed our general obligation and related bonds on review, we are pleased that they have identified that economic indicators may point to the start of economic stabilization for the commonwealth," Puerto Treasury Secretary Melba Acosta Febo and GDB chairman David Chafey said. "We are further encouraged that Moody's recognized our growing labor force, our economic plan focused on job creation, and the strength of fiscal 2014 revenue growth in the general fund through October."
Puerto Rico bond prices declined on the secondary market Thursday morning.
The eight other bonds or notes currently at Baa3 put on review for a downgrade are: Public Building Authority bonds, pension funding bonds, Puerto Rico Infrastructure Finance Authority special tax revenue bonds, Convention Center District Authority hotel occupancy tax revenue bonds, Government Development Bank senior notes, Municipal Finance Authority bonds, Puerto Rico Highway and Transportation Authority transportation revenue bonds, Puerto Rico Aqueduct and Sewer Authority commonwealth guaranteed bonds.
Robert Slavin is a reporter for The Bond Buyer.