Moody's Investors Service has downgraded the Puerto Rico Sales Tax Financing Corporation's (COFINA) outstanding senior sales tax revenue bonds to Aa3 from Aa2 and outstanding subordinate sales tax revenue bonds to A3 from A1 . The rating changes impact $16 billion of outstanding bonds.


The downgrades reflect our view of the increased risk in the bonds' escalating debt service structure as a result of the effects on Puerto Rico's economy of the extended recession coupled with structural changes in the manufacturing sector due to the phase-out of territorial tax benefits and exposure to greater global competitive forces. The combined result is that the commonwealth's economy is expected to underperform compared to the US economy, decreasing the likelihood that sales tax collections will achieve the growth necessary to maintain levels of debt service coverage consistent with prior rating levels and compared with other credits at that rating level. The senior bonds were downgraded by one notch to Aa3 to reflect our expectation that coverage will decline in the future to levels more consistent with the new rating level. The rating on the subordinate bonds was lowered by two notches, to A3, to reflect our expectation that the lower revenue growth rate will make total debt service coverage narrow considerably.

The rating also reflects the bonds' strong legal structure which includes the first right to certain sales taxes collected in the Commonwealth of Puerto Rico, a collection mechanism that separates those monies from the General Fund, a non-impairment covenant by the commonwealth and an effectively closed lien. We note that revenue collections have been below initial projections even though enforcement of the tax has recently improved significantly.

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