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With a Downgrade on Debt Imminent, Puerto Rico Needs a Visit from Santa Claus

December 23, 2013 Blog

As Puerto Rico’s economy continues to deteriorate and its bonds continue to erode in value, it sure seems as if the island commonwealth could use a visit this Christmas from Santa Claus.

Moody’s listed the island commonwealth’s failures to access the public debt markets and declines in liquidity among five factors that could trigger a downgrade. The three other factors Moody’s listed that could trigger a Puerto Rico ratings downgrade were the following:  financial under-performance in coming months; economic indicators in coming months that point to a further downturn in the economy; and the inability of the government to achieve needed reform of the Teachers’ Retirement System.

Fitch ratings also cited concerns over the commonwealth’s ability to raise money in reporting potential downgrades.

“Any further downgrade would push the ratings into a speculative or ‘junk’ grade,” wrote the Bond Buyer’s Robert Slavin.

A Moody’s analyst also reported that the ratings agency estimated that a “one notch downgrade could result in the liquidity demands of up to $1 billion, an amount (Moody’s) believed could be covered by current liquidity but would significantly narrow remaining net liquid assets,” according to the Bond Buyer report.

The $1 billion estimated cost of a downgrade compares to Puerto Rico’s revenue figures for December 2013 of $911.3 million.

Perhaps the biggest cloud on the horizon is Puerto Rico’s likely inability to access the debt markets in the future.  Puerto Rico officials, according to a Reuter’s report, said last week that they were pushing back possible issuance to next year of as much as $1.2 billion in sales-tax bonds that were expected to have been sold during 2013.

Puerto Rico has also been trying to meet its obligations by selling key assets such as the right to collect toll bridges and airport fees to third party investors.

Puerto Rico is in this financial mess for a number of reasons. It’s been in or near recession for nearly eight years and recklessly issued bonds to pay its way. Folks are fleeing the island for lack of work and yields on Puerto Rico’s debt are already the highest of any municipal issuer, according to a Reuters report.

Remember, when bond yields rise, that means the price of the bond is falling. So, soaring yields on Puerto Rico’s debt is bad news for the thousands of mom and pop investors on Puerto Rico and the U.S. mainland who hold the securities in various Muni Bond funds issued by UBS, Oppenheimer, and other financial giants.

A bailout from Uncle Sam seems politically impossible in the current environment. That means officials in Puerto Rico – along with Puerto Rico bondholders – are likely praying for a visit from Father Christmas to alleviate this pending Muni Bond disaster.

Perhaps Santa Claus could save the day and sprinkle a little good credit or liquidity in the Puerto Rico Christmas stockings?

On Christmas Eve, that’s a mighty fine wish. But come Christmas morning, Puerto Rico bond investors will only find coal in their stockings and the dread of a coming downgrade to the island’s debt.

Zamansky LLC are securities and investment fraud attorneys representing investors in federal and state litigation against financial institutions. For more information about Zamansky LLC, please visit