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MOODY'S ASSIGNS Baa1 RATING TO UPCOMING SALE OF APPROXIMATELY $450 MILLION PUERTO RICO GOVERNMENT DEVELOPMENT BANK SENIOR NOTES

07 Sep 2011

Outlook is negative based on commonwealth's outlook

Puerto Rico (Commonwealth of)
State
PR

Moody's Rating

ISSUE

RATING

Senior Notes, 2011 Series C

Baa1

  Sale Amount

$450,000,000

  Expected Sale Date

09/08/11

  Rating Description

General Obligation

 

Opinion

NEW YORK, Sep 7, 2011 -- Moody's Investors Service has assigned a rating of Baa1 to the Government Development Bank for Puerto Rico's (GDB) planned $450 million sale of unsecured senior notes. The outlook is negative, reflecting the negative outlook on the Commonwealth of Puerto Rico. The Senior Notes, 2011 Series C are expected to be sold the week of September 5. GDB will use the proceeds from the sale of the 2011 Series C Notes to make a loan to the Secretary of Treasury pursuant to Act No. 1 of June 26, 1987, as amended, for the purpose of managing intra-year cash flow needs of the commonwealth. The notes rank on parity with other senior debt of the GDB currently outstanding and issued in the future-including long-term, medium-term and commercial paper notes-and are payable from any available funds of the bank including underlying loan repayments, investment income, and sale of refunding notes. Subsequent to the sale of the 2011 Series C Notes, GDB expects to issue further notes, with an aggregate total par amount not exceeding $745 million.

SUMMARY RATING RATIONALE

The rating on the GDB notes is aligned with the rating of the commonwealth's general obligation bonds, due to the close linkage between the commonwealth and the GDB. The GDB acts as the financing arm of the commonwealth, and there are many areas where the two are connected, including their mission, their governance, and their exposure to the economy of the island.

The rating and the outlook are therefore the same as that of the commonwealth; if the commonwealth general obligation bond rating changes, the rating on the GDB notes will change as well.

For additional commentary on the commonwealth's credit situation, please see our report dated August 8, 2011.

The GDB rating reflects the following credit strengths and challenges:

Credit strengths:

* Essential public funds management and financing arm of the commonwealth government, with strong bi-partisan support for its mission and continued financial strength.

* Substantial and relatively stable base of government sector deposits serve as foundation for the bank's investment and lending activities.

* Loan portfolio is almost exclusively government-sector, and largely tied to the commonwealth itself as the direct or indirect source of repayment.

* Investment portfolio is sizable and liquid.

* GDB rules on approving loans to municipalities and instrumentalities of the central government have become more stringent in recent years.

*Management is typically strong (though leadership changes are frequent).

Credit challenges

* Reflecting control by the commonwealth, the GDB's financial condition has historically been highly correlated with the commonwealth's own political/fiscal cycles.

* Commonwealth's ongoing fiscal strain is expected to drive continued borrowing demands on GDB - both by the commonwealth itself and by various public corporations.

* Ongoing GDB access to non-governmental funding sources is dependent on market confidence in the commonwealth, which could be affected negatively by potential rating downgrades.

DETAILED CREDIT DISCUSSION

GDB GOVERNANCE AND POWERS

The Government Development Bank is a public corporation and governmental instrumentality of the commonwealth created by the legislature in 1948. The Enabling Act establishes GDB's charter, which provides that its existence is perpetual. GDB is an instrumentality of the Commonwealth of Puerto Rico and is accounted for as a component unit of the commonwealth government.

The principal functions of Government Development Bank are to act as fiscal agent, paying agent and financial advisor to the commonwealth and its instrumentalities, public corporations and municipalities; to provide interim and long-term financing to the commonwealth and its instrumentalities, public corporations and municipalities, and to private parties for economic development; and to act as depositary or trustee of funds for the commonwealth and its instrumentalities, public corporations and municipalities.

Under its charter, GDB has the power, among other things, to borrow money, to issue bonds, notes, debentures, and other obligations, to lend money to and purchase obligations issued by the commonwealth, its instrumentalities, public corporations and municipalities, and to lend money to any other person when such moneys are to be used to develop the economy of Puerto Rico.

In its role as fiscal agent and financial advisor, it acts as advisor to the commonwealth and its instrumentalities in connection with all their borrowings; all such borrowings are subject to prior approval by GDB.

GDB lends to, and purchases and guarantees certain obligations of, the commonwealth and its instrumentalities, public corporations and municipalities. It provides interim financing to these entities in anticipation of their refinancing such indebtedness in the bond market and also provides long-term financing to such entities. In fiscal years 2010, 2009, and 2008, GDB disbursed individual lines of credit and other financing facilities to the public sector in aggregate amounts of approximately $3.3 billion, $3.8 billion, and $2.8 billion, respectively.

GDB also lends to the private sector, mainly through its subsidiaries, the Tourism Development Fund (TDF) and the Housing Finance Authority. From time to time, GDB also issues letters of credit to guarantee obligations of private lenders with respect to financing arrangements that promote the development of the commonwealth's economy. TDF's lending activities and guarantees have no recourse on the GDB as losses are appropriated as part of the commonwealth annual budget.

GDB is generally exempt from commonwealth taxation. While private banks on the island of Puerto Rico are regulated by FDIC and the Commissioner of Financial Institutions of the Commonwealth, the GDB is only regulated by the Commissioner of Financial Institutions of the Commonwealth.

ESSENTIAL FINANCIAL ARM OF COMMONWEALTH GOVERNMENT

The GDB has historically enjoyed strong bi-partisan support for its mission and its continued financial strength. It is viewed as an essential arm of the commonwealth government, based on its role of providing critical financial support to the government sector - which represents a large and important part of the Puerto Rico economy. The bank's financial resources and independent borrowing abilities also serve as an important source of fiscal cushion for the commonwealth government in times of general budgetary stress. While GDB support available to the commonwealth and its instrumentalities has been a rating factor in analysis of the commonwealth and instrumentalities, Moody's also believes that the commonwealth would use its resources (such as taxing power) to support the GDB if it were necessary (although it never has been necessary, and Moody's does not see this as a likely scenario).

GDB'S FINANCIAL CONDITION

GDB had $13.3 billion in assets as of December 31, 2010, and $11.5 billion of liabilities, resulting in $1.7 billion of net assets.

Within the $13.3 billion of assets, GDB had $4.9 billion of investments and $7.7 billion of loans. The government of Puerto Rico makes up approximately 30% of the loans held, public corporations make up approximately 40%, and municipalities the balance.

GDB's loans to the private sector (excluding the lending activities of its subsidiaries, the Housing Finance Authority and the Tourism Development Fund) are done solely for commercial and industrial ventures. GDB also provides working capital loans to the private sector. As of December 31, 2010, GDB had approximately $4.3 million of outstanding loans to the private sector.

Within the $11.5 billion of liabilities, GDB had $5.9 billion of deposits and $4.9 billion of bonds. The deposits, which are not insured by FDIC, are by mostly public corporations or agencies. There are also private deposits by institutional clients and other companies.

The GDB's direct exposure to the commonwealth through loans has declined. From fiscal year 2009 to fiscal year 2010, commonwealth loans held by GDB declined from $2.45 billion to $2.2 billion, a drop of 9.8%.

ONGOING GDB MARKET ACCESS DEPENDENT ON GENERAL CONFIDENCE IN COMMONWEALTH GOVERNMENT

As GDB's credit quality is closely tied to that of the commonwealth government, the bank's ongoing ability to access non-governmental funding sources, such as private deposits and the commercial paper market, is likely to be highly dependent on continued confidence in the commonwealth government.

GDB and the commonwealth have both enjoyed strong market access. With triple tax exemption throughout the U.S., both have had strong market access in the U.S. market. They have also had strong market access in the local Puerto Rico market.

Outlook

The rating outlook is negative, reflecting the stress the commonwealth will face in the next few years as it continues to attempt to address the underfunding of the retirement system from an already weak financial and economic position.

What could move the GDB's rating down?

* downgrade of the Commonwealth's G.O. rating

* actions by the Commonwealth (not expected) that significantly weaken the GDB's financial condition, such as large equity transfers out or a large reduction of public sector deposits in GDB.

What could change the GDB's rating up?

* upgrade of the Commonwealth's G.O. rating

The principal methodology used in this rating was Moody's Methodology for Rating U.S. Public Finance Transactions Based on the Credit Substitution Approach published in August 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the rating are the following: parties involved in the ratings, [and] public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Analysts

Emily Raimes
Analyst
Public Finance Group
Moody's Investors Service

Baye B. Larsen
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA

MOODY'S ASSIGNS Baa1 RATING TO UPCOMING SALE OF APPROXIMATELY $450 MILLION PUERTO RICO GOVERNMENT DEVELOPMENT BANK SENIOR NOTES
No Related Data.
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