Puerto Rico Credit Rating Cut by Moody’s to One Level Above Junk

Puerto Rico had its debt rating cut by two levels today, to one step above speculative grade by Moody’s Investors Service, which cited “reduced prospects for a strong economic recovery.”

The island had $9.8 billion of general obligations as of March 31, according to the Government Development Bank for Puerto Rico. The credit grade is now Baa3, with a negative outlook, the New York-based company said.

Moody’s lowered grades for $38 billion of debt sold by commonwealth issuers, including pension bonds and borrowings of the sewer authority. The U.S. commonwealth’s debt is held by investors nationwide, as it is exempt from federal and state taxes in all jurisdictions.

Puerto Rico debt had already been trading at “lower credit-quality levels for a while,” said Daniel Solender, who helps manage $17 billion of munis, including Puerto Rico general obligations, at Lord Abbett & Co. in Jersey City, New Jersey.

“There definitely could be some impact,” Solender said.

Moody’s also cited Puerto Rico’s unfunded pension liability as cause for the downgrade. As of June 30, 2011, Puerto Rico’s Employees Retirement System had assets equaling 6.8 percent of estimated retirement payments, making it the worst-funded in the nation. Illinois had a ratio of about 43 percent, the lowest among states, data compiled by Bloomberg show.

Bid Lost

Republican Governor Luis Fortuno, who has cut the commonwealth’s payroll to help balance budgets, lost a re-election bid last month against Alejandro Garcia Padilla, a member of the Popular Democratic Party. The new governor takes office Jan. 2.

“We are not pleased with Moody’s action today, and we disagree with the fact that they did not give the incoming administration more time to introduce its fiscal team and their work plan to address these issues,” Juan Carlos Batlle, president of the development bank, said in a press release.

Garcia Padilla has named Javier D. Ferrer, a Harvard University-educated corporate lawyer, to be the bank’s next president.

Since the election, Puerto Rico general obligations have weakened. A bond due in 2041 traded today with an average yield of 5.04 percent, about 2.5 percentage points above a benchmark index, data compiled by Bloomberg show. The difference was 2 percentage points when the bonds first sold in March.

Standard & Poor’s grades Puerto Rico BBB, two levels above junk.

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