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Reuters English News Service

Improper Procedures Threaten Puerto Rico Credit

By Kristin Roberts

December 11, 2002
Copyright © 2002 Reuters Limited 2002. All Rights Reserved.

MIAMI, Dec 11 (Reuters) - Puerto Rico was warned on Wednesday the credit rating on its $21 billion of outstanding debt could be downgraded, as a Wall Street agency questioned accounting and management controls at the island's fiscal agent, the Government Development Bank.

Standard & Poor's Ratings Services put the debt on Credit Watch with negative implications just six months after slapping the island with a downgrade due to ongoing budget deficits and one-time maneuvers that were hurting its economy.

S&P's move on Wednesday reflected "concerns over its general ability to enforce appropriate accounting, fiscal and management controls," said Ken Gear, S&P analyst.

According to the credit ratings agency, three unrated issues sold by Puerto Rico agencies and a municipality incorrectly listed the Government Development Bank as the debt's ultimate obligor.

At least $55 million in debt related to equipment leases was issued by the Commonwealth's Education Department and Natural Resources Department as well as the municipal government of Rio Grande without the appropriate authorization from the Government Development Bank, as required by a 1993 executive order, S&P said.

Of that $55 million, $8 million to $10 million of the loans have been rescued from default by the Government Development Bank, Gear said.

The bank, which acts as financial adviser to the government and makes long-term loans to the private sector, liquidated those loans to protect investors and has pledged to liquidate any others that fall behind in payment.

"But it speaks to some concerns about management controls," Gear told Reuters.


The Government Development Bank chastised S&P for its action, calling the $55 million of transactions in question "immaterial" when viewed in the context of the island's total $21.4 billion in outstanding bonds.

"With all respect to Ken Gear and S&P, I think it is out of proportion and out of context," said Hector Mendez, president of the Government Development Bank in San Juan. "There is a very big misunderstanding about this issue."

"We were very transparent about this and immediately called S&P and investors when we realized it. We appreciate strongly each one of the U.S. investors that buy our debt and we want to be responsible," Mendez told Reuters in a telephone interview.

The Commonwealth has begun an internal, departmental audit to determine if other bonds may have been issued without proper authorization. Puerto Rico has 78 municipalities and 200 agencies that issue debt through the bank.

Mendez said that casting the improper procedures of three issuers as a problem with the Commonwealth's management structure was much like faulting all of the U.S. accounting industry for individual cases such as Enron, the bankrupt energy trader.

S&P's decision opens the door to further ratings action within one to three months. A downgrade would make Puerto Rico's borrowing costs more expensive. The agency in May cut Puerto Rico's rating to "single-A-minus" from "single-A."

Puerto Rico has been an aggressive debt issuer for more than a year as the island's administration capitalized on both the strong municipal bond market and the draw of its triple-tax-exempt paper. Interest on Puerto Rico's bonds is not taxed at the federal, state or local level.

The island carries more tax-supported debt than all but three U.S. states, according to data from Moody's Investors Service, and the Commonwealth estimates debt service alone will exceed $1 billion in fiscal 2003, or about 14 percent of the budget.

This Caribbean Business article appears courtesy of Casiano Communications.
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