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Moody’s Cuts Puerto Rico Rating Further into Junk

Moody’s Cuts Puerto Rico Rating Further into Junk

Posted by Juan Gavasa on February 21, 2015

Moody’s Investors Service cut its rating on Puerto Rico’s debt further into junk territory, citing tax revenue shortfalls and weak economic growth that may accelerate a decline in government liquidity.

The two-notch downgrade brings the rating on Puerto Rico’s general obligation bonds to Caa1—seven steps below investment grade—and the ratings firm signaled possible future downgrades by leaving its outlook at negative.

Puerto Rico has a high probability of a default on central government debt within the next two years, Moody’s said in its report. If the commonwealth can’t complete a planned bond sale to refinance about $2 billion in internal loans and replenish the island’s Government Development Bank, cash for operations could run out.

federal judge on Feb. 6 blocked a law allowing some public agencies to restructure their debts, underscoring the need for restructuring that may go beyond the Puerto Rico Electric Power Authority, which is negotiating with creditors, Moody’s said.

“The continued economic and fiscal weakening together with this ruling may mean that Puerto Rico’s options for avoiding a consolidated debt restructuring, including all of its obligations, are dwindling,” the report said.

Puerto Rico, which has more than $70 billion in debt, continues to struggle with a weak economy, population declines and dwindling government liquidity. Its bonds are widely held by mutual funds and individuals nationwide because of its tax advantages.

Moody’s also dropped its ratings on Puerto Rico’s Sales Tax Financing Corp.’s senior and subordinate bonds to B3 and Caa1 from Ba3 and B1 respectively, and the notes of the Government Development Bank of Puerto Rico to Caa2 from Caa1.

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