Investors see Puerto Rico downgrade curbing appeal of its bonds

Wed Feb 5, 2014 6:15pm EST
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By Michael Connor

NEW YORK (Reuters) - Puerto Rico will face trouble selling bonds after Standard & Poor's cut its credit rating to junk status, spelling possible trouble for the cash-strapped U.S. territory as it tries to push ahead with debt deals worth as much as $2 billion, some big institutional investors said on Wednesday.

Popular because of its triple tax-free status, Puerto Rico's outstanding debt totals $70 billion, or nearly four times the $18 billion owed by bankrupt Detroit. Some 70 percent of mutual funds dedicated to tax-free bonds own Puerto Rico bonds, according to Morningstar.

But the ratings cut by S&P, which came in the closing minutes of trading on Tuesday, could sap investor interest, despite the high yields offered by Puerto Rican bonds.

"The island will need to borrow relatively soon to meet its obligations, and it may well find it difficult or impossible to access the market for financing," said Peter Hayes, head of BlackRock's Municipal Bonds Group.

Puerto Rico officials said after the ratings cut, which opens the government to as much as $940 million in penalties tied to swaps and other securities, that they are studying financing options and instituting cost savings.

In San Juan, Puerto Rican Governor Alejandro García Padilla said on Wednesday he would seek to renegotiate swaps agreements and other loans that will require accelerated payments.

The island last sold bonds in August and has, according to sources, considered a possible $2 billion financing by institutional investors organized by Morgan Stanley, bond deals and loans by banks on the island.

The downgrade "calls into question whether they'll be able to bring those offerings to the market," said Dan Heckman, senior fixed income strategist at U.S. Bank Wealth Management. "It just continues to drive their interest expense higher and higher."   Continued...

A woman walks past a closed restaurant in Ponce, on Puerto Rico's southern coast, February 5, 2014. REUTERS/Alvin Baez