Commonwealth of Puerto Rico GO Rating Lowered On Fiscal 2013 Budget Gap

Standard & Poor's (S&P) Ratings Services announced it has lowered its general obligation (GO) rating on the Commonwealth of Puerto Rico to 'BBB-' from 'BBB'. The outlook is negative.

"We base the downgrade on the result of an estimated fiscal 2013 budget gap, which we view as significantly larger than originally budgeted, absent corrective action," said Standard & Poor's credit analyst David Hitchcock. "We believe the shortfalls against budget in fiscal 2013 will make it difficult for the commonwealth to achieve structural balance in the next two years," Mr. Hitchcock added.

If, in that time frame, only limited progress is made to reduce what S&P considers large structural budget gaps, the rating could be lowered even further. The incoming administration of Governor Alejandro Garcia Padilla is considering a number of corrective budget actions, and has proposed what is seen as major reform of Puerto Rico's poorly funded pension system. However, S&P feels that the size of the potential fiscal 2013 budget gap and potential future years' structural deficits warrant a rating action at this time.

Standard & Poor's did not lower the rating on the appropriation debt, which is typically rated one notch below the GO, reflecting current law that allows the governor or budget director to first, prioritize the payment of principal and interest corresponding to public debt, and second, to bind obligations to safeguard the credit, reputation, and good name of the government, when available funds for a specific fiscal year are not sufficient to cover the appropriations approved for that year. Given this structural feature, Standard & Poor's does not believe at this time that Puerto Rico's appropriation credit is speculative-grade.

The negative outlook is the result of projections of what S&P sees as large shortfalls against budget in fiscal 2013, absent corrective action, that will make it difficult for the commonwealth to achieve structural balance in the two-year outlook horizon. If only limited progress is made in upcoming budget cycles in significantly reducing large structural budget gaps, S&P could lower the rating further. Standard & Poor's will evaluate the fiscal effect of potential fiscal and pension reforms in determining future credit trends.

In response to the lower credit rating, Governor García Padilla said S&P's decision is a "wake up call for all puertoricans and for all sectors of interest, on the gravity of the fiscal situation." He added that it is also "a clear example of the irresponsability of those that did not take in the past the corresponding corrective actions."

He concluded with what seemed a call to action for the Legislature, stating that while S&P recognizes that the current administration is evaluating important budgetary measures and a significant reform of the pension system, things must move beyond the discussion of proposals. "They await action. The country deserves action. We need to regain our country. Let us join forces. Let us act with certainty and great sensibility."