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Moody’s, S&P Downgrade Puerto Rico Bond Rating, Borrowing Costs To Rise… NPP Leaders Blame Calderon… AAV Blames Legislature

Moody’s Downgrades Puerto Rico Rating

May 20, 2005
Copyright © 2005. All rights reserved.

[Puerto Rico, which has more debt per capita than any of the 50 U.S. states, had its credit-rating cut to two levels above junk status by Moody's Investors Service because of borrowing to plug budget deficits.[

NEW YORK -- Moody's Investors Service has downgraded the Commonwealth of Puerto Rico's general obligation bond rating to Baa2 from Baa1, and kept the rating outlook negative. The downgrade reflects:

* the Commonwealth's deteriorating General Fund financial condition in fiscal years 2004 and 2005, both of which have seen large operating deficits financed with borrowing,

* a greater-than-expected decline in the Commonwealth-owned Government Development Bank's net liquidity position during 2005 (due in part to the acceleration of govern grant and loan disbursement funded GDB resources),

* a significant increase in the Commonwealth's outstanding tax-supported debt, now approaching 60% of personal income, as a result of the budgetary deficit financings in the past two years as well as borrowings for government capital projects, and

* on a positive note, the recognition by Commonwealth officials of the necessity of restoring structural budget balance as soon as possible, as embodied in the fiscal 2006 budget proposals advanced to date.

The rating change also reflects a continuing problem of very large and growing unfunded government pension liabilities, despite steps taken to increase the retirement age and close the system to new participants a few years ago. In addition, while the Puerto Rico economy is currently recording positive growth on many measures, it continues to expand at a slower pace than the US mainland and could see some negative effects in future from the government's expected efforts to balance the budget through tax increases and slowing the rate of expenditure growth.

The Commonwealth's role in the local economy is very large relative to other U.S. state and municipal governments, and thus its budget actions have a greater potential effect. The economy is now highly concentrated in pharmaceutical manufacturing, an industry that has continued to prosper despite the almost completed phase-out of federal tax incentives for US firms operating on the island. We do not expect the big pharma firms to be directly affected by the Commonwealth's budget problems.

Today's rating action affects $7.3 billion of outstanding G.O. bonds and $3.5 billion of Commonwealth guaranteed debt issued by government agencies, which carry the Commonwealth's G.O. rating. In addition, $4.4 billion of outstanding Commonwealth appropriation bonds have been downgraded to Baa3 from Baa2, and $800 million of outstanding Commonwealth Tax and Revenue Anticipation Notes (TRANs) have been downgraded to MIG 2 from MIG 1. A further $8 billion of outstanding revenue bonds related to transportation and infrastructure programs, as well as pooled municipal loans, have also been downgraded to Baa2 and Baa3 (see detailed list below).

The downgrade of the Commonwealth's Fiscal 2005 TRANs to MIG 2 reflects the increased net cash needs of the General Fund, combined with the greater-than-expected decline in the GDB's net liquidity position. Discussions with the bank indicate that its ability to support the cash needs of the General Fund is now dependent to a high degree on the bank's continued access to the public commercial paper market, including substantial CP note rollovers prior to the June 29, 2005 maturity date of the TRANs.

While we do not believe that market access problems are likely to occur, this no longer meets our MIG 1 standard for short-term municipal notes. The GDB's commercial paper is not rated by Moody's. We note that the Commonwealth is required to set aside one-third of the note repayment obligation in a segregated repayment account in each of the months of April, May, and June. As of this week, $370 million of the $812 million total requirement has been segregated.


The rating outlook for the Commonwealth remains negative at this time, reflecting the size of the government's current financial problems and the likelihood that turning these problems around will take time to achieve and involve inevitable implementation risks.

We are encouraged by government proposals to attempt to achieve budget balance without borrowing in the next fiscal year, and to increase the level of recurring pension contributions. There is also a proposal to issue a large pension funding bond to boost the funding level.

Standard & Poor’s Officially Downgrades Puerto Rico’s Credit


May 24, 2005
Copyright © PRWOW 2005. All rights reserved.

The predictions several analysts and economists had made on Friday were confirmed Tuesday, when news sources announced that Standard & Poor’s had officially downgraded the Commonwealth of Puerto Rico's credit rating.

The credit rating fell from —A to BBB and kept a negative outlook.

This new downgrade follows that of Moody's Investors Service, which last week lowered Puerto Rico's general obligation bond rating to Baa2 from Baa1, and was also accompanied by a negative outlook.

Moody’s rating change was attributed in part to the Commonwealth's deteriorating General Fund financial condition in fiscal years 2004 and 2005, both of which have seen large operating deficits financed with borrowing.

Local economists have said these downgrades will increase interest rates on bond issues and will make it harder for the local government to finance long-term infrastructure projects such as highways, schools, and hospitals.

Puerto Rico Debt Downgrades To Lift Borrowing Costs

By Enrique Martel

May 24, 2005
Copyright © 2005 Reuters Limited. All rights reserved.

SAN JUAN, Puerto Rico, May 24 (Reuters) - The downgrade of Puerto Rico bonds by two credit ratings agencies will increase borrowing costs for the U.S. territory during the upcoming fiscal year, market participants said on Tuesday.

Miguel Ferrer, president of the largest brokerage house on the island, UBS Financial Services, said the downgrades could increase Puerto Rico's costs by 10 to 15 basis points annually on bond issues.

Standard and Poor's Ratings Services late Monday downgraded its rating on Puerto Rico Government Development Bank debt to "BBB-plus". The rating agency also lowered the rating on Puerto Rico's general obligation bonds to "BBB".

The agency last downgraded the island's debt in May 2002.

S&P's announcement followed an action last week by Moody's Investors Service, which downgraded Puerto Rico's general obligation bonds to "Baa2".

The downgrades have been anticipated since 2003, after S&P issued its negative rating outlook, citing Puerto Rico's borrowing to cover annual structural deficits -- estimated at $1.3 billion for the current fiscal year that ends June 30.

The island's executive office belongs to the Popular Democratic Party while the pro-statehood New Progressive Party controls the Legislature, and the two sides are struggling to agree on a budget for the fiscal year that begins July 1.

"The downgrades were not surprising," said Ferrer of UBS, a major underwriter of Puerto Rico bonds. "It was a clear message, 'Get your house in order.' The executive office and the Legislature must sit down and negotiate a new budget because this won't only affect the cost of borrowing. It could also be detrimental to the economic development of Puerto Rico."

The status of the bonds of Puerto Rico's Public Finance Authority, the Housing Bank and Finance Agency and the Highway and Transportation Authority face the immediate threat of being downgraded to junk bonds. This group received the lowest "investment grade" rating out of all the Puerto Rico government bonds that were downgraded by Moody's.

If the bonds are downgraded to junk status, mutual funds and other institutional investors that restrict the amount of "non-investment grade" obligations they can hold in their portfolios will have to sell existing bonds, according to a security broker in New York associated with Puerto Rico.

Total accumulated public debt for Puerto Rico increased $9.5 billion in just 2-1/2 years. Total debt as of Dec. 31, 2004 amounted to $39.4 billion, up from $29.9 billion in June 2002, according to the Government Development Bank of Puerto Rico.

As a percentage of its budget for fiscal year 2005, Puerto Rico's debt ratio of 16.6 percent was second among U.S. states, listed by the GDB, behind only Mississippi's 21.5 percent.

Legislative Leaders Blame Calderon For The Downgrade

May 20, 2005
Copyright © 2005 EFE. All rights reserved.

SAN JUAN (EFE) — The leaders of the Legislative Assembly, as well as New Progressive Party (NPP) Sen. Pedro Rossello on Friday blamed the past administration of Gov. Sila Calderon for Moody’s downgrade of the Commonwealth of Puerto Rico's general obligation bond rating.

House Speaker Jose Aponte said that during the past four-year term–when Gov. Anibal Acevedo Vila was resident commissioner–, NPP legislators had tried to warn about the disastrous consequences that Calderon’s fiscal measures would have on Puerto Rico.

Aponte said the credit downgrade means bond issues will be more expensive, and it will be harder for the government to repay debts acquired to build schools, highways, and other infrastructure developments

Senate President Kenneth McClintock said that despite a $1.5 billion deficit, the current administration insists on submitting a budget increased by hundreds of millions of dollars.

McClintock, however, said that regardless of political differences, they all have a commitment to balance the budget and prevent a further downgrade of the government’s credit.

Aponte reiterated that the Legislature has rejected the governor’s proposed budget because they are working on a new one to cut government expenses by more than $1.3 billion.

Meanwhile, Rossello said in a prepared statement that the credit downgrade only confirms the financial disaster the Calderon administration has left behind.

Rossello said the credit downgrade only confirms the financial disaster the Calderon administration has left behind.

Puerto Rico Gov. Comments On Credit Rating


May 20, 2005
Copyright © 2005 AP. All rights reserved.

SAN JUAN, Puerto Rico (AP) -- Puerto Rico's governor urged the opposition-dominated legislature Friday to pass this year's budget, blaming the delay for Moody's Investors Service's decision to lower the government's credit rating.

''The investors and analysts of Puerto Rican credit don't see the National Assembly's political will to make decisions that are difficult but courageous and correct,'' Gov. Anibal Acevedo Vila told a news conference.

His comments came a day after Moody's lowered the government's credit rating from Baa1 to Baa2, saying the U.S. Caribbean territory's economic outlook was negative. The move will cost Puerto Rico an extra $10 million in interest on bonds issued to finance infrastructure projects.

Acevedo Vila took office Jan. 2, vowing to take aggressive steps toward plugging a $1 billion deficit and reducing a $37 billion public debt.

He submitted a $9.7 billion budget proposal in March that would eliminate 23,000 government jobs and close several public agencies.

But legislators from the pro-statehood New Progressive Party, which controls the National Assembly, have refused to approve the budget, expressing concern about new taxes and saying they will submit an alternative.

Acevedo Vila belongs to the Popular Democratic Party, which supports keeping Puerto Rico's status as a U.S. commonwealth.

He noted that his budget proposal earned one of the few positive remarks in the Moody's report.

''If a plan like the one we proposed is adopted, we will start to straighten out Puerto Rico's finances,'' Acevedo Vila said.

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