July 1 (Bloomberg) -- The credit rating of Puerto Rico was cut three levels further into junk by Moody’s Investors Service as a law allowing some government entities to restructure debt outside bankruptcy failed to contain the U.S. commonwealth’s fiscal crisis.
The general-obligation rating went to B2 from Ba2, with the potential for further cuts, according to its release. The change affects $14.4 billion of debt. The New York ratings company also cut sales-tax debt, known as Cofina bonds, to speculative grade, leaving the commonwealth without an investment-grade credit.
The new law has sapped investors’ confidence in Puerto Rico because it “brought into question the value of their promise to pay any debt,” said Guy Davidson, who helps manage $30 billion of state and local debt as director of munis at AllianceBernstein Holding LP in New York.
The Moody’s decision shows that little is certain about what has grown to become a $73 billion obligation for the commonwealth and its agencies. The tax-free debt is held in 66 percent of U.S. muni mutual funds as the yield created by risk made it a mainstay of U.S. municipal finance. The downgrade now leaves those investments at risk and the poverty-ravaged island with few options to finance itself.
Its economy has contracted by about 11 percent since 2006, according to the Puerto Rico Planning Board. The unemployment rate of 13.8 percent is more than double the U.S. average. About 45 percent of its residents are in poverty, according to U.S. Census data. The commonwealth for years has borrowed to keep its government functioning, and investors hungry for the rewards of risky debt kept lending.
Bondholders of the Puerto Rico Electric Power Authority, a utility that could be restructured under the new law, today received full payment on maturing debt, according to a statement from the Government Development Bank, which handles the commonwealth’s finances.
A revision of Prepa’s $8.6 billion debt would be the largest ever in the $3.7 trillion municipal-bond market.
Puerto Rico has “a new preference for shifting fiscal pressures to creditors, which, in our view, has implications for all of Puerto Rico’s debt, including that of the central government,” Moody’s analysts led by Edward Hampton wrote in the report released today.
Puerto Rico general obligations maturing July 2035 and originally sold at 93 cents on the dollar in March traded today at an average 86.6 cents, down from 89.1 cents yesterday, data compiled by Bloomberg show.
Benchmark muni yields were little changed today following Puerto Rico’s downgrade. Yields on top-rated 10-year municipal debt increased to 2.371 percent at 4 p.m. today, up from 2.368 percent yesterday, according to data compiled by Bloomberg.
To contact the reporter on this story: Mark Schoifet in New York at firstname.lastname@example.org
To contact the editors responsible for this story: Stephen Merelman at email@example.com Mark Schoifet