The municipal bond market prepared for the possibility of its biggest default ever after the Puerto Rico legislature approved a law to allow public corporations to restructure their debt.

Passage of the law spurred Fitch Ratings to lower $8.7 billion of Puerto Rico Electric Power Authority debt to CC from BB on Thursday, calling a default "probable." Moody's Investors Service cut its rating on $8.8 billion of PREPA debt to Ba3 from Ba2, citing "concerns about increasingly tight liquidity," and saying the law "suggests the possibility of a restructuring of some kind."

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