S&P Cuts Puerto Rico Debt to Junk

Standard & Poor’s on Tuesday cut Puerto Rico’s credit rating to junk status, citing the Caribbean island’s inability to borrow money to cover looming budget deficits.

All of Puerto Rico’s general obligation debt was cut one level to BB+, the high level of junk status debt. S&P said all of its ratings on Puerto Rico remain on watch for additional downgrades.

In a statement released Tuesday afternoon, S&P said the decision to downgrade Puerto Rican debt was based on the ratings firm’s belief that the island will have difficulty accessing liquidity from the Government Development Bank of Puerto Rico (GDB).

“We also believe that the Commonwealth's access to liquidity either through GDB or other means will remain constrained in the medium term, even in the event of a potential issuance of debt planned next month. We believe that these liquidity constraints do not warrant an investment-grade rating,” S&P said in the statement.

S&P is the first of the three major credit ratings companies to chop the struggling commonwealth's credit rating to junk. Both Moody's Investors Service and Fitch Ratings have Puerto Rico on watch for a cut into junk status.

Puerto Rico is a self-governing commonwealth of about 3.7 million people. The island’s economy has been shrinking in recent years even as government liabilities have increased, namely pensions for government workers. Unemployment hovers at around 15%.

The rating cut wasn’t unexpected. S&P put Puerto Rico on watch for a possible downgrade last month, saying the government had become to reliant on the Government Development Bank.

Unlike Detroit, which is a U.S. municipality, Puerto Rico is a territory and does not have the option of filing for a debt restructuring under a bankruptcy filing.

S&P is afraid Puerto Rico’s fiscal troubles will make it more difficult for the commonwealth to access loans through capital markets.

S&P said the rating would have been cut even further if not for progress made by the current administration in reducing operating deficits as well as successful reforms of the public employee and teacher pension systems.

S&P said such reforms had been “elusive in recent years.”

“We view the reform as significant and could contribute to a sustainable path to fiscal stability,” S&P said.