UPDATE 1-Puerto Rico asks Moody's to revisit ratings cut

Thu Jul 19, 2012 4:22pm EDT

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By Michael Connor

July 19 (Reuters) - Puerto Rico wants Moody's Investor Service to revisit a ratings downgrade of $16 billion of sales tax debt, saying the Wall Street credit ratings agency was ignoring an upturn in the Caribbean island's long-moribund economy.

Top Puerto Rico government officials said Moody's ratings cuts on Wednesday of outstanding Puerto Rico Sales Tax Financing Corp debt needed to be reconsidered by the credit-ratings group.

Moody's said the island's weak economy will generate softer-than-expected sales tax revenue that backs payments of the sales tax revenue bonds.

Moody's cut Puerto Rico Sales Tax Financing Corp's senior sales tax revenue bonds by one notch to Aa3 from Aa2 and its subordinate bonds by two notches to A3 from A1.

Ratings downgrades typically raise future borrowing costs for issuers and often hurt prices of outstanding bonds. A big issuer of bonds in the $3.7 trillion U.S. municipal bond market, Puerto Rico has about $68 billion of tax-free bonds outstanding. It pays the highest yields among big municipal borrowers.

"We completely disagree with this rating action," said Juan Carlos Pavia, the director of Puerto Rico's Office of Management & Budget. "We think it is unmerited and badly timed. We are formally requesting a review."

A spokesman for Moody's in New York declined to comment, saying, "Discussions between Moody's and its issuers are confidential."

Puerto Rico officials said they were taking the unusual step because the ratings cuts made little sense after the island posted its best quarter yet for sales-and-use-tax revenue.

In addition, Puerto Rico's economy appears to be expanding in 2012 after six years of recession. Puerto Rico economic data shows growth of 0.9 percent so far this year.

"With such positive economic indicators, we have to conclude that this action is based on external economic conditions," Treasury Secretary Jesus Mendez said.

Other ratings agencies currently rate the sales-tax debt above the new Moody's rating, according to officials, who said they expect no other adverse ratings actions.

Puerto Rico finance officials had met several times with Moody's analysts since April 17, when Moody's warned a downgrade was possible.

Moody's on Wednesday said the rating outlook for the sales tax revenue bonds was stable but expected Puerto Rico's economic growth to lag that of the United States and produce weaker-than-expected growth in sales-tax revenues that would hurt debt-service coverage.

Last month, Standard & Poor's revised its outlook on outstanding Puerto Rico general obligation debt to negative from stable. It was "critical" for the government to transition to structurally balanced budgets after fiscal year 2013.

Even with the downgrades, Cofina, as the sales tax corporation is known in Spanish, remains a healthy issuer, Janney Capital Market Managing Director Alan Schankel said in a commentary on Thursday.

"We continue to believe Cofina is the strongest of the major Puerto Rico bond issuers," Schankel said.

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