Fitch downgrades Puerto Rico's debt to junk status

Fitch Ratings downgraded Puerto Rico's debt by two notches to junk status on Tuesday, following similar moves last week by credit rating agencies Standard & Poor's and Moody's.

Territory's debt held by 70% of U.S. municipal mutual funds

A man in Ponce, on Puerto Rico's southern coast, stands next to a stand displaying newspapers with headlines referring to last week's downgrade by Standard & Poor of the U.S. territory's credit rating. Standard & Poor's, Moody's and Fitch have now all downgraded Puerto Rico's debt to junk status in the latest blow to an economy that has been battling chronic recession, high unemployment, population decline and a perennial budget shortfalls that have left it with $70 billion in debt. (Alvin Baez/Reuters)

The last of three major credit rating agencies downgraded Puerto Rico's debt by two notches to junk status on Tuesday .

Fitch Ratings praised the U.S. territory for responding quickly to economic challenges but noted the economy remains weak and its access to the bond market is impaired.

The agency also said that Puerto Rico's bonded debt levels and unfunded pension liabilities are very high compared to U.S. states and that recent downgrades have led to a potential $1 billion US in new liquidity demands.

"Puerto Rico's current management has repeatedly shown its ability and willingness to take quick action to address financial challenges and external market concerns," Fitch said. "However, underlying the need for these measures is the very difficult economic, financial and market situation that management continues to confront."

Re-entering bond market

David Chafey, chairman of Puerto Rico's Government Development Bank, revealed Tuesday that Barclays, Morgan Stanley and RBC Capital Markets will be the underwriters for an upcoming general bond issuance. It is unclear how much debt officials plan to sell, or on what date. Chafey only said the bonds would be issued in the "near term."

Puerto Rico is preparing to re-enter the bond market and has assured investors that it will not default on $70 billion in public debt. Puerto Rico's bonds are popular with U.S. investors because they are exempt from federal, state and local taxes, and its debt is held by roughly 70 per cent of U.S. municipal mutual funds, according to Morningstar.

David Tawil, co-founder and portfolio manager of New York-based Maglan Capital, said Puerto Rico will now have to tap into a different set of lenders in the next few years, including hedge funds and banks.

"It is no longer your average municipal bond holder," he said in a phone interview. "It's going to be much more strategic, much more active type of investors."

Unemployment at 15%

Fitch announced its downgrade one day after Garcia unveiled several measures to help boost the U.S. territory's economy as the island of 3.7 million people battles its eighth year in recession and a 15.4 per cent unemployment rate, higher than any U.S. state.

Treasury Secretary Melba Acosta said she was disappointed by Fitch's decision while the administration of Governor Alejandro Garcia Padilla announced it was pushing back by almost one week a webcast to update investors on Puerto Rico's fiscal and economic plans.

Last Tuesday, Standard & Poor's downgraded Puerto Rico's credit by one notch while Moody's lowered it two notches on Friday.