Puerto Rico’s Debt Gets Downgraded to “B” by Fitch Ratings

Credit rating agency Fitch Ratings (“Fitch”) has downgraded the general obligation and related debt of Puerto Rico to “B”, rating it even further into junk territory and three notches under investment grade, because of worries about the U.S. territory’s ability to go through with planned financing. As a result of the downgrade of the general obligation debt, the Puerto Rico Aqueduct and Sewer Authority senior lien revenue bonds were also downgraded.

The ratings reduction is related to a new law in the Commonwealth. The law is supposed to help overhaul public debt by letting certain government agencies with a reported $19.4 billion in outstanding bonds restructure their debt. Fitch is worried that because of the way the restructuring is delineated in the law, this could result in debt payment suspensions while “precluding timely payments” of principal plus interest until proceedings are finalized.

Fitch also reduced the rating of Puerto Rico’s sales tax entity COFINA, pension funding bonds, and the Public Building Authority government facilities’ revenue bonds. The credit rating agency pointed to mixed economic signs, such as accelerated year-over-year declines in the labor force and yearly drops in the monthly economic activity index of the Government Development Bank, as the reason for the new downgrades. Recently, Standard & Poor’s also reduced the general obligation debt of Puerto Rico to junk bond status- a BB, which is right below investment grade.

This week, Prepa (the Puerto Rico Electric Power Authority) is slated to talk with creditors to get certain loans extended-either that or it may have to pay back $696 million of borrowed funds to support its business. According to路透社，bondholders have offered the beleaguered utility company another $2 billion in financing for restructuring. Moody’s Investors Service (MCO), another credit rating agency, expects Prepa to default on a $400 million payment to bondholders in July. The authority, now junk-rated too, missed its deadline earlier this month when it was supposed to give lenders its restructuring plan.

Over the last few years, investors in Puerto Rico municipal bonds have had to contend with major losses in light of the Commonwealth’s financial problems. The island is over $70 billion in debt. Many investors found themselves in trouble after they were persuaded by UBS (UBS), Banco Santander (BNC), and Banco Popular to invest in the Puerto Rican muni bonds or closed-end funds tied to Puerto Rican debt.

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Fitch Cuts Puerto Rico’s Rating Deeper Into Junk, Wall Street Journal, March 26, 2015

Puerto Rico’s PREPA bonds mixed after $2 bln financing offer, Reuters, March 30, 2015

More Blog Posts:
Standard and Poor’s Reduces Puerto Rico Obligation Debt to Junk Status, Stockbroker Fraud Blog, February 6, 2014

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