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S&P cuts Puerto Rico's general obligation debt ratings to junk

Standard & Poor's on Tuesday cut its credit rating on Puerto Rico, dropping the cash-strapped U.S. territory's debt to junk-bond status on concern about its ability to access capital markets.

S&P, which had placed Puerto Rico's rating on notice for a downgrade last month, said it now rates the Caribbean commonwealth at "BB ,'' one level below investment grade. Previously it had rated it "BBB-."

With some $70 billion of tax-free debt, Puerto Rico has a long soured economy and has for months been under threat of a ratings downgrade to junk-bond territory by all three U.S. credit ratings agencies.

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Moody's and Fitch Ratings have not announced ratings decisions.

S&P said it worried that Puerto Rico, a Caribbean island populated by 3.62 million people, has limited ability to sell more debt in the U.S.'s $3.7 trillion municipal bond market and faced possible cash shortages.

"We believe these liquidity constraints do not warrant an investment-grade rating," S&P said in a commentary.

The move could also squeeze the island commonwealth's cash reserves. S&P peer Moody's, in a Dec. 23 report, said Puerto Rico could face up to $1 billion in collateral demands and note accelerations in the case of a one-notch downgrade by any of the ratings agencies.

In a release, Puerto Rico's Treasury Secretary and Government Development Bank said they were disappointed with S&P's decision but remained optimistic.

"We are confident that we have the liquidity on hand to satisfy all liquidity needs until the end of the fiscal year, including any cash needs resulting from today's decision," the statement said. "The GDB and the Commonwealth of Puerto Rico have been in discussions with parties that have expressed an interest in arranging additional liquidity for the Commonwealth, and the Commonwealth continues to explore such options, including obtaining additional funding, as necessary."

S&P, which also cut its rating on the island's fiscal agent, the Government Development Bank, to BB, said that all of its revised Puerto Rico ratings remain on negative watch.

CNBC.com contributed to this report.

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