UPDATE 1-Moody's says Puerto Rico road bonds may be downgraded

Wed May 29, 2013 5:31pm EDT

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May 29 (Reuters) - Moody's Investors Service said on Wednesday it may reduce its A2 rating on $86.1 million worth of Puerto Rico Highways Authority GARVEE bonds because the Caribbean island tapped a reserve fund to pay debt service on the securities.

Puerto Rico, a large issuer of municipal bonds, drew on the reserve fund after the U.S. Treasury withheld federal highway grant payments that backed the GARVEES, or grant anticipation revenue bonds.

"The bonds are on review for possible downgrade due to the need to evaluate the debt service notification and payment procedures on the grant anticipation revenue bonds at PRHTA in coordination with the Commonwealth of Puerto Rico," Moody's said.

Puerto Rico officials took money on March 19 from a debt service reserve fund to make GARVEE payments but has since replaced the funds with earnings from another fund. The reserve is now fully funded, the Wall Street ratings agency said.

Moody's said the federal government held back the GARVEE payments to offset money the commonwealth owed the U.S. Army Corps of Engineers. Negotiations in the dispute are underway, Moody's said in a news release.

"Moody's expects to evaluate the commonwealth's plan to remediate the potential for future late debt service payments in case of future interceptions. We expect to conclude the review within 90 days," it said.

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