Standard & Poor’s changed the outlook on Puerto Rico’s sales tax bonds to negative from stable on Monday afternoon.

S&P is keeping its AA-minus rating on the COFINA senior sales tax revenue bonds and the A-plus rating on the first subordinate sale tax revenue bonds.

“We base the outlook revision on what we view as Puerto Rico’s current declining economic and population trends,” S&P credit analyst David Hitchcock said in a news release.

On Friday the Government Development Bank of Puerto Rico announced that the commonwealth’s economic activity index was down 5.4% in August from a year earlier.

The island’s population in 2012 was down 2.37% from 2011 and 3.67% from 2000.

It is impossible to completely isolate credit quality from the commonwealth’s financial and economic condition, Hitchcock and credit analyst Horatio Aldrete-Sanchez said.

Puerto Rico will require some, albeit limited, economic growth to be able to cover the subordinated bonds in 2041, the analysts said.

On the plus side, for the next several years annual debt service coverage is strong for both senior and subordinate COFINA bonds, the analysts said.

Tax collections have shown signs of increasing recently, despite the economic contraction, they said. The bonds also have a strong legal structure separating them from Puerto Rico’s government.

The negative outlook means that S&P believes there is at least a one-in-three chance that it will lower the bond ratings in the next two years.

In the budget adopted at the end of June for the current fiscal year, the sales tax base was expanded to include some business services. The anticipated increase in revenue is considered a positive for these bonds’ creditworthiness, the analysts wrote.

This past week, the Puerto Rico Treasury Department announced that it would introduce a bill to increase the sales and use tax percentage allocated to COFINA to 3.5% from 2.75%. This would allow the government to issue more of the COFINA bonds, it said.

“We are looking at long term trends, and we believe a short term increase in sales tax, even a substantial one, is a relatively small effect compared to the annual compounding of revenues necessary for long term payment of debt service necessary for the later maturities,” Hitchcock told The Bond Buyer.

“Please note that we still believe that Puerto Rico will be able to achieve long term growth in sales tax receipts, as we have not changed the rating, and we have recognized an increase is expected this year,” he said.

“However, we are focusing on the revenue growth consistent with rating levels over the long term, with maturities that extend to 2057, and our concern if there is a severe economic downturn or long run economic weakness over a long period of time that revenue growth might be slower than originally expected,” Hitchcock said.

On Monday, the Puerto Rico Treasury and GDB said they welcomed S&P’s affirmation of the sales tax bond ratings.

They said that the Puerto Rico government was executing a plan to attract investment in Puerto Rico.

“The plan focuses on supporting our strongest sectors, including pharmaceutical, biotechnology and medical devices, and attracting other industries such as infrastructure, aerospace, business services and information technology,” the Treasury and GDB said. “Significant recent results include a $137 million three-year federal contract for the manufacture of military apparel, which will create 2,200 jobs; a $250 million investment for the expansion of a medical devices company that will create 350 new jobs; the acquisition of a majority interest in one of our premier luxury resorts by Paulson & Co.; and the increase in air access and cruise ship traffic.”

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