Moody's Investors Service downgraded Puerto Rico's general obligation rating to Caa1 from B2, as it cut a number of Puerto Rico credits deeper into junk, saying tax revenue shortfalls because of sluggish economic growth may harm the Commonwealth's liquidity.
The rating agency downgraded Government Development Bank for Puerto Rico notes to Caa1 from B3, Sales Tax Financing Corp. (COFINA) senior bonds to B3 from Ba3, COFINA subordinate bonds to Caa1 from B1, Puerto Rico Highways and Transportation Authority senior bonds to Caa2 from Caa1, Puerto Rico Infrastructure Finance Authority bonds to Caa2 from B3.
It affirmed the Caa1 rating for the Puerto Rico Aqueduct and Sewer Authority.
All the ratings have negative outlooks.
Moody's rating on the general obligations is lower than the B rating on the GOs from S&P and the BB-minus rating from Fitch Ratings.
The Caa category is used for bonds in "poor standing and subject to very high credit risk," Moody's spokesman David Jacobson said.
General Fund revenues have been coming in 2.5% below projections through the first 7 months of the fiscal year, Moody's analysts Ted Hampton and Emily Raimes wrote in the Thursday report.
"In view of still anemic economic trends, the revenue gap could widen after April income tax payments," they wrote. "Puerto Rico's Economic Activity Index as of December was down 1.4% on a year-over-year basis."
They also highlighted concerns about the liquidity of the GDB and Puerto Rico's ability to sell a bond, which would shore up the GDB's liquidity, in the next few weeks,
The analysts said that Puerto Rico anticipates a 35% increase in debt service in fiscal year 2016, which starts July 1, 2015. In the following years, due to COFINA's rising debt service requirements the commonwealth's debt burden increases.
Puerto Rico's legislature has just started considering the adoption of a major tax overhaul proposed by Gov. Alejandro García Padilla. This would shift the tax system from one focused on income to one focused on consumption and would shift the island from a sales tax to a value added tax.
"VATs successfully implemented elsewhere, including in the Caribbean, have had positive tax revenue effects," Hampton and Raimes wrote. "However, the tax overhaul's enactment and implementation will carry risks."
Puerto Rico's debt burden is high compared with U.S. states, they wrote. Puerto Rico's adjusted net pension liability was 223% of revenues compared with a U.S. state median of 60% of revenues.
"Downgrades of some ratings to Caa2, a notch below the commonwealth's GO rating, reflect the vulnerability of pledged revenues to a constitutional provision that provides a claim in favor of general obligation bondholders," they wrote.
Michael Ginestro, director of municipal research at Bel Air Investments, and Howard Cure, director of municipal research at Evercore, said Moody's downgrade probably would have little impact on the market. Most people that follow the credit already have an opinion about it one way or another, Ginestro said.
However, NewOak managing partner Triet Nguyen said the downgrade would "make their market access even worse than it was already."
The hedge fund community is still interested in purchasing Puerto Rico debt, Ginestro said. The Puerto Rico Infrastructure and Finance Authority's anticipated big bond that will be used to pay off the PRHTA's debt to the GDB will get done even if it must be sold at yields from 10% to 15%.
Nguyen said he believed S&P's B rating was a bit more accurate than Moody's Caa1.
Puerto Rico government sources didn't immediately get back to The Bond Buyer with a comment on Moody's action.
