Research firm Sterne Agee analysts Todd L. Hagerman and Robert Greene released an industry note today on the topic of the issues surrounding the Commonwealth of Puerto Rico’s Government Development Bank. Analysts have been pointing to a funding shortfall for the GDB for some time and the increasing likelihood of a ratings downgrade unless significant steps are taken.

The fact that both S&P 500 (INDEXSP:.INX) and Moody’s Corporation (NYSE:MCO) ratings agencies recently put Puerto Rico’s debt obligations under review for a possible downgrade means the clock is now officially ticking, and according to Sterne Agee, the Commonwealth must access the public markets sometime in the next couple of quarters to fend off a downgrade.

GDB making desperate moves

Several sources have pointed out the GDB has had to make some desperate moves to shore up its balance sheet. Recent decisions such as transferring more than $2.8B in public deposits out of private banks to the GDB to improve liquidity, have not been reassuring to the markets. The GDB’s recent decision to place of $110M in Senior Guaranteed Notes with the Puerto Rico State Insurance Fund Corporation at 8% interest also smacks of desperation.

Puerto Rico government debt

Puerto Rico economy looking up

The good news is that Puerto Rico’s long-moribund economy is finally showing signs of life. The Commonwealth’s Economic Activity Index posted its third consecutive positive growth monthly reading for the first time in 14 months. Recent economic data also showed the unemployment rate had dropped by a full point in just one month, from 15.1% in September to 14.1% in November.

Puerto Rico Economic indicators

Stern Agee’s call

Stern Agee analysts Hagerman and Greene say that they believe that the GDB will get its act together before the other shoe drops. “While there has been wide-spread speculation in the media surrounding the Commonwealth’s fiscal problems, our sense is the Government Development Bank (GDB) is close to accessing the long-term capital markets to ease investor fears. Although the structure of such an issuance remains to be seen, we believe the funding mechanism will likely entail both an investment grade issue, together with a funding back-stop, as a means to ease any immediate liquidity concerns and debt service requirements over an extended time frame.”