SAN JUAN, Puerto Rico – Top Puerto Rican officials met Tuesday with credit rating agencies in New York amid growing concerns the U.S. territory’s general obligation bonds might be downgraded to junk status.
The meeting came as the island prepares to re-enter the bond market next month and two of the remaining three credit rating agencies recently placed Puerto Rico on watch for a possible downgrade. The island has entered its eighth year in recession and is struggling with $70 billion in public debt and a 15.4 per cent unemployment rate, higher than any U.S. state.
The meeting held at Puerto Rico’s request was one of several that have occurred in recent months.
Meanwhile, a group of Puerto Rico opposition legislators called for a study to determine how the Caribbean island would be affected by a downgrade.
“We have to be prepared for anything,” said Rep. Ricardo Llerandi Cruz, who filed the resolution. “A downgrade to a junk classification would have a disastrous effect on business and our residents.”
Puerto Rico bonds currently hover above junk status as Gov. Alejandro Garcia Padilla continues to take steps such as approving changes to crumbling public pension plans to appease credit rating agencies. He also recently signed a law aimed at helping the island take on new loans and better manage its ability to repay its debt.
Puerto Rico’s government is a major issuer of bonds in the U.S., where the bonds are popular because they are exempt from federal, state and local taxes. But investors have become increasingly concerned amid speculation about Puerto Rico’s ability to pay off its debt, while the Government Development Bank cut sales of new bonds late last year because of high interest rates.
However, a recent analysis by Morningstar indicated investors have been responding more to widespread pessimism rather than Puerto Rico’s actual credit situation.
“The aggressive sell-off in the second half of 2013 seems to be more a product of sentiment and perceived risk than of true credit deterioration,” its report said. “The credit picture has been rather mixed, not definitively negative.”