GO
Loading...

ANALYSTS' VIEW-Puerto Rico rating cut to junk by S&P

Feb 4 (Reuters) - 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 concerns about its ability to access capital markets.

Puerto Rico is one of the $3.7 trillion municipal bond market's biggest issuers, with some $70 billion of bonds outstanding.

Following are views on the development from investors and analysts:

JAMES COLBY, CHIEF MUNICIPAL STRATEGIST, VAN ECK GLOBAL, NEW YORK:

The downgrade could prompt selling of Puerto Rico debt by some structured management programs or trusts that are required to hold investment-grade securities.

"This action today eliminates the fear of the unknown."

The downgrade also shrinks the pool of potential buyers when Puerto Rico does come back to the market, as it hopes to do in the coming weeks.

"Now you're removing potentially a chunk of the investor community. It does raise the bar, not to mention raise the cost of capital."

"There's a potential here for a good deal of retail selling here in the next couple of days."

DAN HECKMAN, SENIOR FIXED INCOME STRATEGIST, U.S. BANK WEALTH MANAGEMENT, KANSAS CITY:

The downgrade "calls into question whether they'll be able to bring those offerings to the market. I was somewhat skeptical that they were going to be able to come to market anyway."

"This potentially drives up their overall interest costs. It just continues to drive their interest expense higher and higher."

"Given the volatility we've recently witnessed both internationally and in the equity markets, I think it just makes riskier types of issuers more challenged in this type of environment."

"The muni market has been well prepared for this possibility. Any negative reaction by the general market would be somewhat muted and short-lived. I don't think people are going to sell out of their high quality ownership of a municipality just because of Puerto Rico."

SHAWN O'LEARY, SENIOR RESEARCH ANALYST, NUVEEN ASSET MANAGEMENT, CHICAGO:

"The market has been way ahead of the rating agencies and that is reflected in the bond prices."

The other two rating agencies to follow shortly with their own downgrades of the commonwealth.

Market access is critical for Puerto Rico, which has used it for deficit financing "year after year."

ERIC JACOBSON, SENIOR ANALYST, MORNINGSTAR, CHICAGO:

Puerto Rico's downgrade to junk will not cause most mutual funds to sell their debt holdings, but those same funds may not be allowed to buy Puerto Rico debt rating below investment grade.

The downgrade is not expected to materially impact current demand by funds for Puerto Rico bonds.

"Most managers have already decided that they do or don't want to own the paper, and either originally avoided it, sold it as they were able (before now), or have chosen to hunker down and hang on, of the belief that they're going to recover and/or pay out at maturity."

(Reporting by Reuters Municipal Bond Markets Team; Compiled by Dan Burns)