Puerto Rico Sales-Tax Bond Grade Cut Two Steps by Moody’s

The credit rating on Puerto Rico’s sales-tax revenue bonds was lowered two levels by Moody’s Investors Service as the commonwealth tackles recurring budget deficits and a struggling economy.

Moody’s said today it cut the rating to A2 from Aa3 on $6.8 billion of senior sale-tax bonds, saying Puerto Rico’s weak economy has significantly limited growth in sales-tax revenue. The New York-based company affirmed its A3 grade on $9.2 billion of other bonds issued by the Puerto Rico Sales Tax Financing Corp., known as Cofina.

The commonwealth’s general-obligation securities, which are tax-exempt in all U.S. states, are on the brink of being cut to speculative levels by major rating companies. Moody’s today affirmed its Baa3 mark on the debt, its lowest investment grade.

Yields on some of the U.S. territory’s general-obligation bonds reached record highs last month as prices slumped. Investors demand about 5.2 percentage points of extra yield to own 10-year Puerto Rico debt instead of top-rated securities, up from about 3 percentage points in mid-August, data compiled by Bloomberg show.

Distressed Levels

Some of the island’s bonds have been trading at distressed levels and yields may rise as much as by 2 percentage points, said Peter Hayes, head of municipal debt at BlackRock Inc.

“It’s a dire situation in terms of the amount of debt they have outstanding, the weakness in their economy,” Hayes said in an interview with Tom Keene and Michael McKee on Bloomberg Radio’s “Bloomberg Surveillance,” before the Moody’s downgrade. New York-based BlackRock, the world’s biggest asset manager, oversees $109 billion of local debt.

Compared with similarly rated credits, “it has been over the years overvalued in our mind,” Hayes said.

“In recent weeks, you’ve seen investors take a hard look at that,” Hayes said. “They’re way ahead of the agencies here. They’re actually pricing it like distressed debt, which is probably right.”

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.

“This administration has implemented a number of very significant measures to support sustainable economic growth through job creation and continued progress towards a balanced budget,” commonwealth Treasury Secretary Melba Acosta Febo and Jose V. Pagan Beauchamp, the interim government bank president, said in a joint statement.

“We are confident that we can demonstrate continued, significant progress on our fiscal and economic development plans,” they said in response to the Moody’s rating action.

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