Puerto Rico rating cut to junk status by S&P

Tue Feb 4, 2014 7:50pm EST
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By Michael Connor

NEW YORK (Reuters) - Standard & Poor's on Tuesday cut Puerto Rico's credit rating to junk status, making it harder for the cash-strapped Caribbean island to borrow in America's $3.7 trillion municipal bond market.

The move was the latest blow to an economy that has been battling chronic recession, population decline and a perennial budget shortfall that has left it with $70 billion in debt.

It also comes as the U.S. territory is preparing to return to the bond market this month for the first time since August with plans to raise as much as $2 billion. The downgrade is likely to make borrowing more expensive, and it could also curb demand.

"Now you're removing potentially a chunk of the investor community," said James Colby, Van Eck Global chief municipal strategist. "It does raise the bar, not to mention raise the cost of capital."

S&P now rates the commonwealth "BB+," or one level below investment grade, a standing that may oblige some institutional investors to dump holdings of Puerto Rico's high-yielding debt.

Puerto Rico's bonds are popular with U.S. investors because they are tax-free in all 50 states and offer high yields. About 70 percent of municipal-debt mutual funds own the securities, according to Morningstar Inc.

Some Puerto Rico municipal bond yields rose above 10 percent after the late-afternoon ratings cut. A general obligation refunding bond maturing in 2036 hit a yield of 10.16 percent after trading at 9.66 percent earlier in the day, though trading volume was extremely light.

"A lot of it was priced in," said Barry HoAire, portfolio manager at Bel Air Investments in Los Angeles. "But the big concern is what is this going to do to Puerto Rico with respect to margin calls and how does that strain their financial flexibility going forward."   Continued...

A billboard announces office space and parking for sale in San Juan, August 31, 2013. REUTERS/Alvin Baez