Rating may be cut to near junk status

Posted on Thu, Mar. 23, 2006

PUERTO RICO

Rating may be cut to near junk status

BY MARTIN Z. BRAUN
Bloomberg News

Puerto Rico, a U.S. commonwealth with more per-capita debt than any of the 50 states, may have its bond rating cut to near junk status because of chronic budget deficits and reliance on borrowing to plug the gaps, Standard & Poor's said.

The Caribbean island is facing a $1 billion budget gap in the current fiscal year. The crisis is exacerbated by a political stalemate between Gov. Anibal Acevedo Vilá and lawmakers over tax increases and spending cuts, the rating company said. S&P rates Puerto Rico's bonds BBB, its second-lowest investment grade rating.

"Of particular concern is the increasing reliance on deficit financing from the Government Development Bank for Puerto Rico, which topped a cumulative $5.6 billion as of Dec. 31, 2005," S&P analyst Ken Gear said in a news release.

Lower ratings may reduce the value of Puerto Rico's $24 billion in outstanding debt and raise borrowing costs as investors may seek higher yields for taking on the risk of the commonwealth's debt.

On March 13, Merrill Lynch & Co. said the extra yield, or spread, investors demand to own longer-term Puerto Rico bonds rather than top-rated municipal debt has widened by 10 basis points since May 2005. A basis point is 0.01 percentage point.

Puerto Rico's per-capita debt burden is $5,758, 61 percent more than Connecticut, the U.S. state with highest tax-supported per-capita debt. Between fiscal year 2003 and 2005, loans to the commonwealth by the development bank increased by $3 billion, according to S&P.

Acevedo Vilá is expected to propose a fiscal year 2007 budget at month-end or early April. If the governor and Legislature don't adopt a new sales tax, the commonwealth's bond rating may be cut, S&P said.

"Passage of a new sales tax is critical to the effort to provide additional revenues and a broader revenue stream that could close most of the existing budget gap," S&P said.

Even if a sales or consumption tax is adopted, the revenue might not be sufficient, because government spending continues to increase. Puerto Rico must cut its "bloated" public sector, which employs 200,000, or 3 of every 10 people in the commonwealth, the rating company said.