NEW YORK: Moody's on Friday cut Puerto Rico's credit rating to junk status, citing concerns about the cash-strapped U.S. territory's weak growth and ability to access capital markets.
The agency, which placed Puerto Rico's rating on notice for a downgrade late last year, said it now rates the commonwealth's general obligation bonds at Ba2, two notches below investment grade status.
Moody's move took the island one step deeper into junk territory than Standard & Poor's, which cut its credit rating to one notch below investment grade status on Tuesday.
With some $70 billion of tax-free debt, Puerto Rico has long been mired in recession and has for months been under threat of a ratings downgrade to junk-bond territory by all three U.S. credit ratings agencies.
Years of deficit financing, pension underfunding and economic recession "have now put the commonwealth in a position where its debt load and fixed costs are high, its liquidity is narrow, and its market access has become constrained," Moody's said in a statement.
The agency acknowledged that Puerto Rico's government had taken "strong and aggressive actions" to cut spending, reform pensions and encourage development but said it does not see "evidence of economic growth sufficient to reverse the commonwealth's negative financial trends."
In a separate report dated Feb. 3, Moody's said that one of its market-based measures indicated that Puerto Rico was at a greater risk of defaulting within the next year than all 50 U.S. states and sovereign issuers save Argentina and Venezuela.
TAX REVENUE BONDS CUT
Moody's also cut its ratings on the island's sales-tax supported senior lien COFINA bonds to Baa1 from A2.
These securities, issued by COFINA, the Spanish acronym for Puerto Rico's Sales Tax Financing Corporation, are viewed by investors as more secure because they are backed by more reliable income streams.
A 2041 maturity COFINA bond with a 5.25 percent coupon fell to 65.7 cents on the dollar from as much as 69.4 cents before the ratings cut. Its yield spread widened to 487 basis points over a comparable AAA-rated security from 423 basis points, according to Municipal Market Data.
S&P did not cut its rating on COFINA, which is expected to be a primary vehicle for any subsequent bond market sales.
The second downgrade of the island's rating this week could force more mutual funds to unload Puerto Rico debt, which has been popular with U.S. investors because it is tax free in all 50 states. About 70 percent of municipal-debt mutual funds own the securities, according to Morningstar Inc.
Some of that selling has been seen this week as funds scrambled to meet investor redemption demands.
The top 10 U.S. mutual funds with the greatest exposure to Puerto Rico have been hit with nearly $3 billion in net outflows over the past year, according to Morningstar data, amounting to about a quarter of the funds' combined net assets.
"Funds may need to turn to selling things like tobacco (bonds) in the near term to raise cash, further exacerbating the market condition," Municipal Market Advisors, an independent municipal bond research firm, said.
The downgrade will also likely raise interest rates and other financial costs for Puerto Rico, which has been readying for a debt sale of as much as $2 billion.
Any sign of difficulty borrowing could subject the island's rating to a further downgrade, Moody's said, as could a worsening of revenues or migration - two problems that have contributed mightily to Puerto Rico's malaise.
"There will be people who simply can't participate," said Barry HoAire, a portfolio manager at Bel Air Investment Advisors in Los Angeles. He said hedge funds that specialize in distressed debt may still participate.
Moody's said its outlook on Puerto Rico is negative, reflecting the commonwealth's ongoing challenges.
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