Moody's Cuts Puerto Rico Rating Three Notches

Moody's Investors Service downgraded Puerto Rico's bond rating to B2 from Ba2, which the ratings firm said affects $14.4 billion of outstanding general obligation bonds.

The move is a response to Puerto Rico Gov. Alejandro Garcia Padilla's proposal last week of new legislation that would allow the island to overhaul debts of some of its public entities such as its power, water and transportation authorities, said Moody's in a report. Moody's ratings change calls into question contentions by the island's government that other government borrowers wouldn't be negatively affected by restructuring of public-corporation debts.

Moody's also slashed bonds backed by Puerto Rico's sales-tax revenues to B2 from Ba2.

The three-notch cuts put the island's debt deeper into junk territory, reflecting concerns that any default by public corporations could reduce the island's ability to sell new bonds to investors, the ratings firm said.

The new legislation, passed last week, doesn't include provisions to restructure general-obligation and tax-backed bonds. David Chafey, chairman of the board of the Government Development Bank for Puerto, previously stated that the proposed legislation should reassure bond investors.

The Government Development Bank of Puerto Rico didn't return an immediate request for comment.

Some Puerto Rico general-obligation bond prices fell Tuesday afternoon after the downgrade. Some such Puerto Rico debt traded recently at 85.375 cents on the dollar, down from 88 cents on Monday. A general-obligation bond due 2035 was the most traded municipal security by value Tuesday, with about $24 million changing hands, according to data from the Electronic Municipal Market Access website.

Moody's also downgraded the debt of its island commonwealth agencies and public corporations, affecting about $46 billion of debt issued by entities such as its power, water and sewer, and transportation authorities. It cut the ratings on Puerto Rico's Electric Power Authority to Caa2 from Ba3 and its Highway & Transportation authority to Caa1 from Ba3, for example.

Moody's said the Puerto Rico Public Corporation Debt Enforcement and Recovery Act will provide for default by "certain issuers that the central government has long supported," saying the law "marks the end of the commonwealth's long history of taking actions needed to support its debt."

The downgrade follows a report by Moody's on Monday that Puerto Rico's new law allowing some agencies to restructure their debts "provides a clear path to default for public corporations."