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The Bond Buyer
Moody's: Puerto Rico Now Negative; Deficit Borrowing, Pension Fund Cited
By Adam L. Cataldo
September 22, 2004
Vol. 349, No. 31974
WASHINGTON -- Moody's Investors Service yesterday revised the outlook to negative from stable on Puerto Rico's general obligation bond rating, saying it is concerned about the commonwealth's borrowing to bridge budgetary shortfalls as well as a sizable pension system liability.
Moody's rates Puerto Rico's $15 billion of GO, commonwealth-guaranteed, and appropriation-backed bonds Baa1. Puerto Rico, which enjoys triple tax-exempt status in the municipal bond market, is planning to sell $550 million of GO bonds Thursday as well as $800 million of tax and revenue anticipation notes later this week.
Moody's analyst Tim Blake said that new information for Puerto Rico's 2004 fiscal year showed that it was forced to borrow $233 million from the Government Development Bank of Puerto Rico to retire Trans it sold last year. "It was unexpected and disappointing," Blake said. "That's the trigger."
Moody's said that in fiscal 2003, Puerto Rico borrowed $250 million from the GDB. Both loans are expected to be paid back over a five-year period, it said.
According to the report, the government recently estimated that at the end of June it had $11 billion in unfunded pension system liabilities. At one point, the pension fund was forced to borrow money from a local bank so it could make its pension fund payments.
The report also noted that there is a large structural imbalance in the budget for fiscal 2005 with "expenditures exceeding revenues by a wide margin."
On the positive side, the report noted that the commonwealth's government has enough legal power to raise revenue and adjust revenues as is necessary. Puerto Rico's long-standing, and continuing, political and economic links to the U.S. have been key to the island's economic expansion and real income growth over the last 20 years.
Standard & Poor's rates Puerto Rico A-minus and assigned a negative outlook last year, citing similar concerns. Fitch Ratings does not rate the island.
"We're kind of holding off from taking any rating action based on the knowledge that they will be having an election in November," said Kenneth Gear, Standard & Poor's analyst. "We want to see what their plans and vision are for the commonwealth's future."
The Moody's revision could have an impact on this week's long-term bond sale. Evan Rourke, a fixed-income strategist at Popular Securities in New York, said that the commonwealth might have to pay a couple of additional basis points in yield to investors in order to compensate for the increased risk that Moody's has identified.
Some investors may have picked up on that risk already. Since 2003, spreads have narrowed between Puerto Rico's 10-year GO bonds and other Baa bonds.
According to Thomson Financial, Puerto Rico has sold about $5.955 billion of insured GO bonds over the last 10 years. MBIA Insurance Corp. provided insurance for about $2.32 billion of that debt at the time of issuance, Financial Security Assurance Inc. was the second-largest insurer at about $1.50 billion, and Financial Guaranty Insurance Co. insured about $1.277 billion.
Puerto Rico is also likely to sell $170 million of appropriation-backed debt before the end of the year in a negotiated sale. If sold, the bonds would provide permanent financing of $230 million for the Coliseum of Puerto Rico, which opened at the end of August. If the deal goes through, the debt will be sold by the Public Finance Corp., a subsidiary of the GDB. Elizabeth O'Brien contributed to this story.