Outlook is negative based on commonwealth's outlook
Puerto Rico (Commonwealth of)
Senior Notes, 2011 Series C
Expected Sale Date
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 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:
* 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).
* Reflecting control by the commonwealth, the GDB's financial condition has
historically been highly correlated with the commonwealth's own political/fiscal
* Commonwealth's ongoing fiscal strain is expected to drive continued borrowing
demands on GDB - both by the commonwealth itself and by various public
* Ongoing GDB access to non-governmental funding sources is dependent on market
confidence in the commonwealth, which could be affected negatively by potential
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
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
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.
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.
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Public Finance Group
Moody's Investors Service
Baye B. Larsen
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS Baa1 RATING TO UPCOMING SALE OF APPROXIMATELY $450 MILLION PUERTO RICO GOVERNMENT DEVELOPMENT BANK SENIOR NOTES
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