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Cash-strapped Puerto Rico junked in a triple ratings blow

Cash-strapped Puerto Rico junked in a triple ratings blow

Posted by PanamericanWorld on February 19, 2014

Puerto Rico has suffered a triple blow from the major ratings agencies, as ongoing financial woes have led Moody’s, Standard & Poor’s and Fitch to downgrade the island’s credit rating to junk status. The action by Moody’s follows a warning issued late last year that a downgrade was imminent, given PR’S ongoing recession, high debt (US $70B) and inability to access capital markets. As forecast, Moody’s new rating of ‘Ba2’ places the territory two spots below investment grade.

S&P’s own downgrade to ‘BB+’ puts PR one level below investment grade, and the agency speculates the demotion could result in over $900MM in penalties tied to variable rate demand obligations, among other securities. Fitch Ratings, rounding out the trio, pointed to PR’s unfunded pension liabilities as a cause for its two-notch downgrade to ‘BBB-’.

The moves will complicate plans to access the US $3.7T bond market. Diminished access to cash could create a liquidity crisis and severely hinder the island’s flexibility as it attempts to balance its budget and extricate itself from an economic morass.

Meanwhile, the Royal Bank of Canada (RBC) recently denied that a rumored $2B-$2.5B financing package is in the works. However, House Finance Committee Chairman Rafael Hernandez has confirmed that legislation will soon be approved allowing PR to borrow up to $3.5B in general obligation bonds, with RBC Capital Markets, Morgan Stanley and Barclays underwriting the deal, which could come as early as March.

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