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UPDATE 1-Fitch third agency to cut Puerto Rico to junk

NEW YORK, Feb 11 (Reuters) - Fitch on Tuesday became the third credit rating agency in a week to downgrade Puerto Rico to junk, citing worries about the cash-strapped U.S. territory's weak economy and reduced ability to finance itself in capital markets.

The move was not a surprise coming as it did after last week's downgrades by Standard & Poor's and Moody's Investors Service left the U.S. territory struggling to avoid default.

Puerto Rico has some $70 billion of debt outstanding and has long struggled with a shrinking economy and population.

Fitch dropped the commonwealth to BB, two notches below investment grade, from BBB-, saying recent downgrades "have triggered new liquidity requirements and lowered expectations for the market available for the commonwealth's debt going forward."

The agency praised recent government reforms, including its pledge to balance the budget in fiscal year 2015, and said the government's commitment to bondholders "remains strong."

But it pointed to a chronically weak economy and high debt and pension liabilities as major challenges.

"This has created spending pressures and limited the commonwealth's ability to use additional leveraging," Fitch said.

Fitch's move comes shortly after Puerto Rico announced plans to issue general obligation bonds to refinance debt and ease a liquidity crunch, though the timing of the sale is unclear.

"We are disappointed with Fitch's decision, though we are pleased that it has recognized Puerto Rico's quick and decisive response to challenges that have arisen in recent years," Treasury Secretary Melba Acosta Febo and Government Development Bank Chairman David Chafey said in a statement.

Since S&P downgrade last week, trading of Puerto Rico debt has exploded in the secondary market.

On Monday, the territory's general obligation refunding bonds were the most actively traded debt in the $3.7 trillion market, with an average yield of 8.53 percent over 88 trades.

The average yield on the bonds was 8.24 percent just one trading day before. The territory's aqueduct and sewer bonds were the fourth-most traded on Monday, with an average yield of 8.695 percent over 62 trades, Municipal Securities Rulemaking Board data shows.

Currently on Municipal Market Data's benchmark scale a 10-year Puerto Rico GO bond is yielding 10.27 percent, a spread of 775 basis points over the highest rated municipal bonds.

Fitch also cut the ratings on debt from Puerto Rico's Public Building Authority, Aqueduct and Sewer Authority and Employees Retirement System to junk.

Its ratings remain negative, suggesting Puerto Rico may be vulnerable to a further downgrade.

Like S&P last week, Fitch did not cut the rating on bonds secured by the commonwealth's sales and use tax. Moody's did cut those bonds ratings, though they retain investment grade status.