December 13, 2012 / 9:45 PM / 5 years ago

UPDATE 1-Moody's cuts Puerto Rico rating two notches to Baa3

SAN JUAN, Dec 13 (Reuters) - Moody’s Investors Service on Thursday slashed Puerto Rico’s credit rating by two notches to Baa3 from Baa1 with a negative outlook.

The decision, which affects $38 billion of outstanding debt, is linked to the U.S. commonwealth’s weak economic outlook, its high - and growing - level of debt, the lack of meaningful pension reforms and a weak financial performance, the credit ratings agency said.

The downgrade left Puerto Rico’s GO rating a single level above non-investment grade, or junk, which is where it was in 2008.

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.

The downgrade comes as the U.S. $3.7 trillion municipal bond market 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.

Puerto Rico’s 30-year yield spread over top-rated bonds on the municipal market traded at 248 basis points last Friday, a record high for 2012, according to Municipal Market Data.

The announcement 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.”

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