UPDATE 1-Moody's downgrades $6.8 bln of Puerto Rico sales tax bonds
NEW YORK Oct 3 (Reuters) - Moody's Investors Service downgraded on Thursday $6.8 billion of Puerto Rico sales tax revenue bonds, citing a weak economy and the much weaker underlying credit rating of the U.S. commonwealth.
Moody's cut the bonds to A2 from Aa3. Although that remains a high investment grade, the move reflects ongoing concern about the economy of the indebted island nation. Puerto Rico's general obligation bonds are rated one notch above junk.
"Persistent and cumulative effects of the weak economy of the commonwealth of Puerto Rico has significantly constrained growth in sales tax revenues," Moody's said in a statement.
Investors have punished Puerto Rico's debt due to concerns about the sputtering economy. The unemployment rate is 13.9 percent, higher than that of any U.S. state. The economy, which last year emerged briefly from recession after six years, contracted by 5.4 percent year-on-year in August.
A 2039 Puerto Rico general obligation carrying a 6 percent coupon was traded this week at 71.5 cents on the dollar, yielding 8.81 percent.
Puerto Rico officials tried to play down the credit rating action.
"We are confident that we can demonstrate continued, significant progress on our fiscal and economic development plans," said treasury secretary Melba Acosta Febo and development bank president José V. Pagán Beauchamp in a joint statement late on Thursday.
The downgraded reflects the view that the sales tax bonds are more tightly linked to the sovereign's underlying credit rating than the previous six-notch gap suggested, Moody's said.
Richard Larkin, senior vice president of credit analysis at HJ Sims & Co., said the downgrade could make it harder for Puerto Rico to sell sales tax bonds.
"Some people are going to look at this as a non-event. The markets have already factored it in because of all the bad publicity," he said. "Other people might say this is a sign of something more to come. I'm not in that camp."
Moody's affirmed Puerto Rico's general obligation bonds at Baa3. Moody's also affirmed $9.2 billion in subordinate sales tax bonds at A3. The outlook for both ratings was revised to negative from stable because of the negative outlook of the commonwealth's general obligation bonds.
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