Puerto Rico May Be Cut to Junk by Moody’s on Weak Economy

Puerto Rico’s general-obligation debt, already graded one step above junk, may be cut by Moody’s Investors Service if the commonwealth’s finances continue to deteriorate and it isn’t able to access credit markets soon.

The decision affects $52 billion of rated debt, Moody’s said. Puerto Rico’s securities are held by more than three-quarters of mutual funds that invest in municipal bonds, according to Morningstar Inc. in Chicago. A rating cut may lead funds to sell some of those holdings.

Moody’s cited the island territory’s “weakening liquidity, increasing reliance on external short-term debt, and constrained market access, within the context of a weakened and now sluggish economy” in a statement on its decision. “These developments exacerbate the longstanding financial strain brought by the commonwealth’s very high debt load and pension obligations, as well as its chronic budget deficits.”

An index that measures Puerto Rico’s economic activity fell in October compared with the same period in 2012. It was the eleventh straight month of year-over-year decline, according to the Government Development Bank, which handles capital-market transactions for the territory.

The index showed improvement on a month-over-month basis. It rose 1.1 percent in September from the prior month, and by 0.6 percent in October. That marked the first consecutive monthly gains since 2012.

Bond Sale

The self-governing commonwealth has been aiming to sell as much as $1.2 billion of sales-tax bonds by Dec. 31 to help balance budgets. A spike in the island’s debt yields has blocked Puerto Rico from accessing the capital markets.

All three major rating companies grade the securities one step above non-investment level, with a negative outlook.

The commonwealth’s bonds have lost 18.5 percent this year, the most since at least 1999, and more than seven times the decline in the broader muni market, Standard & Poor’s total return data show.

Puerto Rico general obligations maturing July 2041 traded Dec. 11 with an average yield of 9.16 percent, the highest level since Sept. 11, data compiled by Bloomberg show. The amount of yield investors demand to hold its tax-exempt bonds is 6.2 percentage points more than top rated 10 year bonds, according to data compiled by Bloomberg.

“While Moody’s has placed our general obligation and related bonds on review, we are pleased that they have identified that economic indicators may point to the start of economic stabilization for the commonwealth,” Treasury Secretary Melba Acosta Febo and Government Development Bank Chairman David H. Chafey said in a joint statement.

“We are further encouraged that Moody’s recognized our growing labor force, our economic plan focused on job creation, and the strength of fiscal 2014 revenue growth in the general fund through October,” they said.

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