Puerto Rico had its credit rating cut deeper into speculative grade by Fitch Ratings, which said proposed legislation calls into question the commonwealth’s willingness to repay its obligations.
Fitch lowered the island’s general obligations to B, five steps below investment grade, the company said in a statement Thursday. Lawmakers in the past two weeks introduced legislation that would allow Puerto Rico to amend its constitution and potentially default. Governor Alejandro Garcia Padilla and the island’s top debt chief have spoken out against the proposal.
More downgrades may occur if “legislation proposing to reduce protections afforded to general-obligation and related tax-supported debt progresses in the legislative process or if there is other tangible evidence that the commonwealth is considering the restructuring of general-obligation debt,” according to a report from Fitch.
Standard & Poor’s gives the commonwealth an equivalent grade, while Moody’s Investors Service rates it two steps lower at Caa1.
The commonwealth had $13 billion of general obligations as of July 31. It lost its investment grades about a year ago amid concern that a struggling economy will strain the commonwealth’s ability to repay its obligations.
Puerto Rico’s Infrastructure Finance Authority, called Prifa, plans to sell as much as $2.9 billion of bonds backed by oil-tax revenue to boost liquidity at the Government Development Bank, which lends to the commonwealth and its localities.
“Recent statements and actions by the legislature that would result in an abrogation of the commonwealth’s commitments to general-government bondholders have increased the challenges to a successful Prifa financing and, at a minimum, are likely to result in an increase in already elevated borrowing costs,” according to Fitch.
The Garcia Padilla administration has attempted to allow certain public corporations to restructure debt, in a bid to shield the general obligations from a similar fate.
General obligations maturing in July 2035 traded Thursday at an average price of 82.43 cents on the dollar, down from 85.32 cents March 13, the last trading day before lawmakers filed the proposed amendment, data compiled by Bloomberg show.
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