Puerto Rico Recent Developments

The three major credit rating agencies, Standard & Poor's, Moody's, and Fitch Ratings, downgraded the Commonwealth of Puerto Rico's debt to "junk" status during the first two weeks of February, citing weaknesses in the island's economy, including lackluster growth and difficulty accessing capital markets. Notwithstanding their concerns, the agencies did recognize the current administration's efforts to take rapid action to address these challenges and a number of major investors remain bullish on Puerto Rico's future.

However, one of the effects of the downgrade is that some institutional debt holders will be unable to continue holding Puerto Rico debt because of rules that prohibit the holding of debt if two of the top three rating agencies classify it as "junk" – as is the case with Puerto Rico. This does not close the door on a new Puerto Rican debt issuance, but it does make it more challenging. In order to increase liquidity, Puerto Rico is currently preparing for the sale of up to $3.5 billion in general obligation bonds in the coming weeks.

To improve the island's current economic situation, the Government of Puerto Rico has said it will implement a series of new fiscal policies such as budget cuts in the coming weeks and has already established an overhaul of the Commonwealth's pension system.

Puerto Rico has also been seeking to attract new capital by implementing tax and economic incentives for investors willing to relocate to the island. Such incentives have caught the attention of John Paulson, president of Paulson & Co., Nicholas Prouty, managing director of Braun Capital Asset Acquisitions, and others who plan to or have already taken advantage of the incentives.

Other investors remain bullish as well. For example, Nicholas Prouty has expressed his confidence in Puerto Rico's quick economic rebound and is investing at least $750 million in various projects, such as the Puerto del Rey Marina in Fajardo and Ciudadela, a large housing/commercial development in San Juan. Mr. Prouty recently delivered keynote remarks at the Puerto Rico CIO & IT Leadership Conference on February 7 in Puerto Rico where he emphasized the island's strengths and reemphasized his belief that the "smart money" is still betting on Puerto Rico. During his speech, Prouty pointed out that the island has become an attractive location for investors such as himself, Blackstone, Goldman Sachs, and DE Shaw. Mr. Prouty's full speech can be viewed by clicking here.
  
On February 18, 2014, the Government Development Bank for Puerto Rico, the Treasury Department, and the Office of Management and Budget hosted a joint webcast to update the investment community on the Commonwealth’s fiscal and economic progress and to provide updated information on financing plans. 

Although the situation in Puerto Rico is serious, the administration appears committed to taking the steps necessary to address the ratings agencies' concerns and the confidence shown by high-net-worth individuals currently investing in Puerto Rico may prove key to alleviating the current crisis in Puerto Rico.

Members of Akerman's Latin America Practice will continue to monitor and report on the developments in Puerto Rico.