* About $38 billion of debt affected
* 30-year yield spread at 2012 high
* Puerto Rico "in disagreement"
By Juan Voyton
SAN JUAN, Dec 13 Moody's Investors Service on
Thursday slashed Puerto Rico's credit rating by two notches to
Baa3, just slightly above the non-investment grade, with a
The decision, which affects $38 billion of outstanding debt,
is linked to the U.S. commonwealth's weak economic outlook and
to the lack of meaningful pension reforms, the Wall Street
credit ratings agency said.
The downgrade comes as the U.S. $3.7 trillion municipal bond
market, where Puerto Rico is a big borrower, sizes up the
incoming administration of Governor-Elect Alejandro Garcia
Padilla, who ousted Republican Governor Luis Fortuno in a close
election last month.
Fortuno was seen as a pro-business reformer whose painful
economic initiatives seemed to be starting to bear fruit.
A clear lack of growth drivers, a decline in population and
unemployment that at 13.8 percent is nearly double that of the
United States, are factors that Moody's listed to explain its
Puerto Rico's spending budget for fiscal 2013 is $9.08
billion, down 2 percent from the year before, mostly due to
continuing declines in payroll spending. Revenue is projected to
be $8.75 billion, just 0.9 percent more than fiscal 2012, with
the shortfall being covered with bond proceeds.
"The budget gap does not include expenditures for
approximately $745 million of debt service payments which are
expected to be refinanced during fiscal 2013", Moody's noted.
The rating agency also added that the commonwealth recently
cut its forecast for economic growth for fiscal 2013 from 1.1
percent to 0.6 percent "indicating that the projected deficit
for the fiscal year ending June 30th will grow".
Puerto Rico's next-tax supported debt stand at $14,000 per
capita "significantly higher than any U.S. state and also
reflective of the relatively low per capital incomes in the
With around 330,000 active and retired members, Puerto
Rico's two main pension plans count on a weak system of funding
which "could also challenge its finances and economy".
At the same time, Moody's lowered the bonds of Puerto Rico's
Public Finance Corporation, its Aqueduct & Sewer Authority and
certain Highways & Transportation Authority bonds to Ba1, the
highest non-investment-grade, or junk, rating.
YIELD SPREAD AT RECORD HIGH
Puerto Rico's 30-year yield spread over top-rated bonds on
the municipal market traded at 248 basis points, a record high
for 2012, according to Municipal Market Data.
The announcement of the downgrade came first from Juan
Carlos Battle, the president of the Government Development Bank,
which acts as Puerto Rico's financial adviser.
"We are not pleased by the action taken by Moody's today and
we are in disagreement that they did not give time to the
incoming administration to present its fiscal team and work plan
to address these issues," Battle said.
"We also disagree with the interpretation of many of the
aspects of the government's present fiscal situation."