PR bonds dropped from S&P indices
The move, which also covers the U.S. Virgin Islands and Guam, stems from “divergence in the performance characteristics from the core investable municipal bond market,” S&P Dow Jones said.
“Puerto Rico municipal bonds are now trading at levels more appropriate for high yield taxable corporate bonds,” S&P Dow Jones said. “Puerto Rico municipal bonds also are experiencing varying degrees of liquidity ... (and) no longer meet the objective established by this investable investment grade index.”
S&P Dow Jones has already stopped adding any newly issued bonds for the three territories to the various indices.
Current index components from the territories are being completely removed from the S&P National AMT-Free and S&P AMT-Free Municipal Series Indices by the month-end March 2014 rebalance utilizing a thre-month rolling rebalance. Beginning with the January month-end rebalance, index components from Puerto Rico and the other territories being removed will be down-weighted by one-third of the par weight each month through the March rebalance.
The bonds being removed from the indices will be available in the official proforma files provided by S&P Dow Jones Indices.
Puerto Rico’s deletion from the indices stems from oversized yields and concerns over the government’s liquidity amid an economic downturn dating back to 2006.
The move by S&P Dow Jones could dampen demand for Puerto Rico debt as the island government prepares to return to the $3.7 trillion municipal bond market next month for the first time in over a year. In the interim, the Government Development Bank has turned to a series of short-term financing deals.
S&P, Moody’s and Fitch all peg Puerto Rico’s GO bonds at just one notch above noninvestment level and have warned of downgrades. The ratings agencies acknowledge aggressive revenue and fiscal reform measures by the administration of Gov. Alejandro García Padilla but want Puerto Rico to prove it can access the capital markets after soaring yields kept it on the sidelines of the muni market last year.
A downgrade could spark a selloff of Puerto Rico bonds by investors barred from buying or holding noninvestment-grade securities. A cut to junk would spur the island’s borrowing costs still higher.
The S&P Dow Jones indices are geared toward tracking general obligation and other investment-grade, tax-exempt U.S. municipal bonds. They don’t include healthcare, multifamily housing and other generally riskier sectors.