Puerto Rico’s general-obligation debt could be headed to junk status if it can’t access more capital to fund its operations through debt issuances.
“Given the current pressures on the rating, the review is likely to result in either a confirmation of current rating levels or a downgrade,” Moody’s said Wednesday.
A downgrade would affect $52 billion in the struggling commonwealth’s rated debt, Moody’s added. It could trigger a sell-off by mutual funds that invest in the municipal bonds market, lowering the value of Puerto Rico’s debt.
The local government wants to float $1.2 billion in sales tax bonds by the end of the month to help balance its budgets. Its bonds have declined 18.5 percent so far this year, according to Standard & Poor’s Municipal Bond Puerto Rico Index.
The commonwealth is currently heavily reliant on external short-term debt and it is struggling to access more capital as its yields have spiked on perceived risk. The island’s heavy debt load, pension obligations (especially for teachers) and running deficits may send it into noninvestment status. The big three credit rating agencies – Moody’s, Fitch and S&P – all have Puerto Rico one step above junk.
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Puerto Rico’s finance chiefs tried to make a silk purse out of the pig’s ear.
“While Moody's has placed our general-obligation and related bonds on review, we are pleased that they have identified that economic indicators may point to the start of economic stabilization for the Commonwealth,” said Treasury Secretary Melba Acosta Febo and Development Bank Chariman David H. Chafey in a statement.