Standard & Poor’s dropped its rating on grant anticipation revenue bonds from the Puerto Rico Highway and Transportation Authority to A from A-plus on Friday and put the rating on CreditWatch with negative implications.

A payment dispute between the United States Army Corps of Engineers and the Puerto Rico government led the United States Treasury to withhold a payment to the PRHTA on March 12. The payment had been specified in a memorandum of understanding in which the Federal Highway Administration had promised to reimburse PRHTA for federal-aid highway projects.

The treasury payment was to be used for a debt service payment by the PRHTA on a Garvee bond to be paid March 15. Despite a fully funded debt service reserve fund, the trustee failed to draw from this source on March 15 and the payment date was missed. On March 19 (a Sunday) after two business days had passed, the trustee made the payment from the bond’s debt service reserve fund.

“Although the U.S. Treasury initially placed and has since removed Puerto Rico from its 'offset’ list related to the USACE dispute, we understand that PRHTA is in discussions with the trustees to develop a plan to ensure the debt service payment issues do not repeat,” wrote S&P credit analysts Georgina Rovirosa and Adam Torres. “We will continue to monitor this plan in order to resolve the CreditWatch.”

S&P expects to resolve the CreditWatch in the next 90 days.

Moody’s Investors Service put its A2 rating on the Garvees on a review for a possible downgrade on Wednesday.

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