February 28, 2014 / 9:22 PM / 4 years ago

UPDATE 1-Moody's rates Puerto Rico $3.5B GO bonds provisional Ba2

Feb 28 (Reuters) - Moody’s Investors Service on Friday assigned a provisional rating of Ba2 to Puerto Rico’s planned issuance of up to $3.5 billion general obligation bonds, saying it expects the U.S. territory to raise sufficient funds to sustain it through 2015.

The cash-strapped island plans to return to the bond market in the coming weeks for the first time since Moody’s and two other Wall Street rating agencies cut its credit to junk status. Puerto Rico has not issued bonds of any kind since August.

Analysts at the agency said the bonds would allow Puerto Rico to repay internal loans from the Government Development Bank, refinance variable rate obligations and terminate costly interest rate swap contracts.

The rating, two notches below investment grade, “reflects our belief that the commonwealth will raise enough cash in the upcoming financing to enable it to maintain an adequate liquidity profile through the end of 2015,” Moody’s said.

However, Moody’s stressed that the rating was preliminary and could change, pointing out that the legislation authorizing the sale includes “atypical terms and conditions.”

One is likely to be the provision that New York legal jurisdiction will apply should litigation become necessary, the agency said, while other conditions remain unclear.

Issuing a preliminary public finance rating before all terms are known is unusual, and a Moody’s spokesman said it was assigned at Puerto Rico’s request.

Puerto Rico’s government has said it intends to raise about $2.86 billion in the sale, which many in the $3.7 trillion municipal bond market see as a test of the island’s ability to continue financing its large budget deficit. Hedge funds are expected to be the biggest buyers.

The island already has outstanding debt of about $70 billion and pays by far the highest tax-free rates of any big municipal bond seller. Its economy is in a nearly unbroken eight-year recession, which has fueled population losses and high unemployment.

Moody’s applauded the government’s “notable steps to rein in debt and spending, to reform retirement systems and to promote economic growth.”

But the agency maintained a negative outlook on the bonds, which it said reflects liquidity pressure, high deficits, pension underfunding and uncertainty in Puerto Rico’s economic future. ()

Puerto Rico’s Senate on Thursday approved a bill authorizing a bond issue of up to $3.5 billion. The lower house of the legislature is slated to vote on Monday.

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