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UPDATE: Puerto Rico's GO debt affirmed by S&P, outlook Negative

March 14, 2014 12:30 PM EDT
(Updated - March 14, 2014 12:38 PM EDT)

tandard & Poor's Ratings Services has affirmed its 'BB+' rating on the Commonwealth of Puerto Rico's general obligation (GO) debt, and affirmed the ratings on various general fund-supported and highways and transportation authority debt. At the same time, Standard & Poor's has removed the ratings from CreditWatch, where they had been placed with negative implications earlier this year. The outlook on the debt is negative, reflecting long-term economic and financial trends.

"The removal of the ratings from CreditWatch reflects Puerto Rico's successful sale this week of $3.5 billion of GO term bonds with an 8.0% coupon and an effective yield of 8.73%," said Standard & Poor's credit analyst David Hitchcock. "In our opinion, the sale will relieve near-term liquidity pressure on the commonwealth," Mr. Hitchcock added.

We understand that sale proceeds will be used to finance the remaining general fund deficit in fiscal 2014; terminate all interest rate swap agreements except for a basis swap, which in our opinion mitigates previous swap termination risk; refinance $466.6 million of variable-rate demand obligation debt that had previous acceleration risk; provide long-term take-out financing for $342 million of Puerto Rico Sales Tax Corp. (COFINA) bond anticipation notes; and pay almost $1.9 billion to refinance loans to the Government Development Bank for Puerto Rico (GDB). It also capitalizes all but a small portion of interest on the new bonds until fiscal 2016. We believe the sale of the series 2014 GO bonds mitigates some short-term risks regarding financing this year's deficit, by mitigating swap termination and debt acceleration risks, and recapitalizing the GDB, a potential source of commonwealth liquidity.

While we have removed the CreditWatch designation, we have assigned a negative rating outlook, reflecting long-term economic and financial trends we see over the next two years. These include the potential for a larger deficit in fiscal 2014 than the $650 million that Puerto Rico now projects after the passage of $170 million of mid-fiscal 2014 budget adjustments, and the potential for general fund operating deficits in fiscal 2015, although the administration has announced its intention to introduce a balanced budget for fiscal 2015. There also remain potential ongoing working-capital liquidity needs for fiscal 2015 and plans by the commonwealth for additional bond sales in fiscal 2015. Puerto Rico will also need to start paying interest on the 2014A bonds beginning in fiscal 2016.

For more information on the commonwealth, please refer to our analysis published March 4, 2014, on RatingsDirect.


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