Puerto Rico G.O. Bonds Lowered Deeper Into Junk by Fitch

Puerto Rico’s credit rating on $13.4 billion in general-obligation bonds was cut one step to BB- by Fitch Ratings after the commonwealth adopted a law that would allow some government entities to restructure debt.

Fitch also downgraded $6.7 billion in senior lien sales-tax revenue bonds, known as Cofina debt, by nine grades to BB- from AA-, third-highest.

Fitch said there was the potential for further cuts because restructuring under the Puerto Rico Public Corporation Debt Enforcement and Recovery Act “would trigger suspension of debt payments and preclude the timely payment of principal and interest.”

Puerto Rico and its agencies have operated for years on borrowed money, racking up $73 billion in debt, according to data compiled by Bloomberg. The law, approved last month, would allow some public corporations to negotiate with bondholders, potentially forcing them to accept unfavorable terms.

While the new law “does not have a direct negative effect on the GO credit, Fitch will closely monitor how passage of the Act affects future market access and commitment to bondholders,” analysts led by Laura Porter wrote yesterday in a report. “Fitch continues to believe that the ultimate success of efforts to put the Commonwealth’s finances on a sustainable path will be driven by the performance of the economy.”

Moody’s Investors Service cut Puerto Rico’s credit rating three steps to B2 on July 1 after the passage of the restructuring law.

Fitch’s downgrade fails to recognize steps taken by Puerto Rico to stabilize its finances, such as the first balanced budget in 22 years and changes to public pensions, David Chafey Jr., chairman of the Government Development Bank, which works on the commonwealth’s debt sales, said yesterday in an e-mailed statement.

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