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Puerto Rico Cofina Cut to Negative Outlook by S&P on Economy

Sept. 30 (Bloomberg) -- Standard & Poor’s lowered its outlook on Puerto Rico’s sales-tax backed bonds to negative from stable, citing the commonwealth’s shrinking economy and population.

The move follows Puerto Rico’s announcement last week of a plan to increase the percent of revenue that it allocates to its sales-tax credit to 3.5 percent from 2.75 percent to refinance debt. The proposal would give the territory of 3.7 million people an additional $2 billion of borrowing capacity through the Sales Tax Financing Corp.

The change reflects “our view of the current economic climate and is not related to the potential for additional leverage,” David Hitchcock, an S&P analyst, said in the report.

The island’s debt is tax-exempt across the U.S., leading investors to hold it in both national and state-specific mutual funds. The island’s general obligations are on the brink of speculative grade from the major rating companies.

If the economy continues on its current path, S&P said there’s at least a 33 percent chance it will cut its rating on the sales-tax bonds, known as Cofinas, within two years. The senior debt carries an AA- grade, fourth-highest, and the subordinate securities are one level lower at A+.

Treasury Confident

“We are confident that we can make continued, significant progress on our fiscal and economic development plans within S&P’s two-year horizon,” Puerto Rico Treasury Secretary Melba Acosta said in an e-mailed statement. “We are maintaining an ongoing dialog with the investment community, including the ratings agencies, to ensure a clear understanding of our plan, our progress and our improving prospects.”

An index measuring the island’s economy fell by 5.4 percent in August from a year earlier, the steepest contraction since 2010, according to Puerto Rico’s Government Development Bank, which handles the commonwealth’s capital-market transactions. The territory’s population fell 2.2 percent from 2000 to 2010, Census Bureau data show.

After the S&P report’s release, Cofina bonds maturing in August 2042 traded as low as 80.03 cents, the weakest since Sept. 12, according to data compiled by Bloomberg.

Puerto Rico securities have lost 16.4 percent this year, according to S&P data. That’s more than four times as much as any other state, and compares with a 2.9 percent drop for the entire $3.7 trillion municipal market.

To contact the reporter on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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