Municipals end unchanged as Puerto Rico G.O. bonds tumble; S&P cuts Puerto Rico debt to CCC-

By Sheri Kasprzak

New York, June 30 – Municipals were flat on the day Tuesday, largely ignoring a hiccup from the Treasuries market.

Puerto Rico bonds continued to slide after news that the island will not be able to repay $72 billion of public debt.

Even after the dust settled on governor Alejandro Garcia Padilla’s announcement that the commonwealth will be unable to repay the debt, Puerto Rico general obligation bond prices continued to tumble.

The commonwealth’s 8% 2035s were seen at 68 with a 12.347% yield to maturity at the close of Tuesday’s session. The yield was as high as 13.028% in morning trading.

At market’s close Monday, the 8% 2035s were at 69.75 with a 12.028% yield to maturity, backing off from a high yield of about 12.255%.

S&P downgrades Puerto Rico

Elsewhere in Puerto Rico news, Standard & Poor’s lowered its rating on the commonwealth’s debt to CCC- from CCC+. This move follows Fitch Ratings’ decision Monday to cut all Puerto Rico debt to CC from B.

In a report released Tuesday morning, S&P said all of Puerto Rico’s debt obligations are potentially at risk for possible restructuring due to the severity of its current fiscal situation.

“We understand the commonwealth intends to pay short-term notes due June 30 and general fund-supported obligations on July 1,” said the S&P statement.

“However, we believe the commonwealth’s very weak liquidity and difficulty in obtaining external market access for cash flow financing raises our likelihood of a debt restructuring within the next six months.

“In our view, Puerto Rico must obtain adequate external cash flow financing within that time frame even if pending bills that would allow the use of liquidity in state insurance and retirement funds were enacted into law and approved by their funds’ respective boards.

“Adding pressure to Puerto Rico’s liquidity and external market access is its most recent projection of a general fund operating deficit in fiscal 2015 and a larger-than-forecasted gap for 2016 with no clarity on when a budget will be finalized.”

So far, Moody’s Investors Service, which downgraded the commonwealth to Caa1 from B2 back in February, has taken no ratings action.

Texas transportation deal cut

Looking to Tuesday’s primary action, the Texas Transportation Commission sold $781.08 million of series 2015 state highway fund first tier revenue refunding bonds. The offering was downsized from $800 million.

The bonds (Aaa/AAA/) were sold through Citigroup Global Markets Inc. and BofA Merrill Lynch.

The bonds are due 2017 to 2026 with 3% to 5% coupons and 0.86% to 2.71% yields.

Proceeds will be used to refund existing revenue bonds.

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