Standard & Poor's yesterday removed $5.2 billion of Puerto Rico Sales Tax Financing Corp. revenue bonds from negative watch and affirmed its A-plus rating on the debt as a proposal to alter the island's sales tax failed to gain support in the Legislature.

Standard & Poor's placed the credit on credit watch with negative implications on June 24 after Gov. Anibal Acevedo Vila proposed decreasing the island's sales tax to 2.5% from 7% and implementing a revamped 6% excise tax instead. The $5.2 billion of outstanding sales-tax bonds are backed by 1% of sales tax revenues, yet the structure of the revenue stream allows the corporation to tap into additional sales-tax receipts beyond the 1% to cover debt service payments.

Lawmakers declined to vote on the measure by the end of the legislative session, which ended June 30. In addition, Puerto Rico's $9.48 billion fiscal 2009 operating budget, which began July 1, does not incorporate a change to the sales tax, according to Standard & Poor's analyst Horacio Aldrete.

"It's unlikely to be approved or even discussed in the legislature," Aldrete said. "And I think the other factor that played into our decision to remove it from the credit watch list was the fact that the fiscal 2009 budget was approved and did not include or prompted any discussion of potential changes to the sales tax."

Fitch Ratings rates the credit A-plus, and placed the corporation on rating watch negative in early February based on the potential change to the revenue stream. Moody's Investors Service rates the sales-tax bonds A1. The rating agency did not place the credit on negative watch list in response the Acevedo Vila's proposal.

Many investors of the sales-tax bonds were not keen on the governor's proposal to alter the revenue stream. Yet administration officials say the sales tax slows down consumer spending and an improved excise tax would be easier to collect.

While Standard & Poor's decision to remove the sales-tax bonds from credit watch negative is good news for the corporation, officials are evaluating the implications, if any, that Lehman Brothers Holding Inc.'s bankruptcy filing may have for a swap agreement the corporation has with a Lehman subsidiary.

Currently, the market value of the swap is in Lehman's favor, as the corporation would need to pay roughly $39 million to Lehman Brothers Special Financing Inc., the counterparty in the swap transaction, if the bankruptcy filing were to force the agreement to unwind, according to Aldrete.

Yet, the corporation could offset that payment by entering into a new swap transaction with a different counterparty, according to Jorge Irizarry, president of the Government Development Bank for Puerto Rico, the island's fiscal adviser.

"We're working on it. We can find someone to substitute the position - including the payment - so, someone can assume the exact position and we're talking to several parties," Irizarry said. "So, in other words, we won't have to make a net disbursement. We'll pay Lehman to unwind, but someone else assumes the same position so we're not out of pocket."

The swap agreement is attached to $218 million of London Interbank Offered Rate-based bonds that the corporation sold in early July in its $2.6 billion Series 2007A sale. To create a synthetic fixed rate on the bonds, the corporation pays Lehman a fixed rate of 4.9% and in return receives 67% of three-month Libor plus a per annum spread equal to 93 basis points, according to the deal's official statement.

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