Standard & Poor's Tuesday downgraded $58.5 million of Puerto Rico Port Authority debt issued for international airport in San Juan to BBB-minus from A-minus, citing borrowing to meet interest payments, among other factors. The outlook is stable.

Moody's Investors Service rates the $58.5 million of senior-lien debt issued for the Luis Munoz Marin International Airport Baa3 with a stable outlook.

Standard & Poor's analyst Laura Macdonald said the drop from single-A to just above junk status is the result of a downturn in the economy and using debt to pay down interest costs.

"They've had recently a weak financial performance and the fact that you're borrowing to pay your interest is never a positive sign," she said. "It's also a challenging period right now in terms of the recession that's already been going on in Puerto Rico that impacts them in terms of the airport."

The authority has $570.8 million of subordinate debt outstanding through the Government Development Bank for Puerto Rico and other banks in addition to the $58.5 million of bonds. Total debt service coverage for the agency is expected to be 1.02 times in fiscal 2009, down from 1.15 times in fiscal 2008.

In addition, the authority has borrowed money to help meet a portion of its debt service payments.

"From fiscals 2007-2009, the authority has paid part of its interest expense on its subordinate lines of credit through a prefunded interest account that is also debt-financed," a Standard & Poor's report said. "This line provided $9.8 million in interest expense in fiscal 2007, and $20.5 million in fiscal 2008; in fiscal 2009, we expect it to provide for $20.4 million."

PRPA anticipates a 28% decline in enplanements at LMM due to American Airline's reduced operations. The authority has limited liquidity and relies upon the GDB to help boost its cash flows.

"Should the GDB's support for the authority weaken, absent any financial improvement, we could lower the rating further," according to the report.

Since Gov. Luis Fortuño took office on Jan. 2, the authority has been under new management, with Alvaro Pilar now serving as its executive director. The agency will review airport tariffs, potentially increase concession space, and implement parking fees at PRPA's regional airports in order to boost revenues. The administration is also reviewing expenditure reductions, according to Standard & Poor's.

GDB president Carlos Garcia yesterday released a statement acknowledging the authority's problems.

"We share Standard & Poor's concern about the [authority's] credit weaknesses and we are determined to address the issues affecting the agency in order to stabilize its fiscal situation," Garcia said in a press release. "The PRPA's lack of strict controls over its operating expenses and the growing use of credit lines to support the authority's needs are a reflection of the challenges that the government of Puerto Rico is facing."

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