Moody’s Investors Service downgraded Puerto Rico’s general-obligation debt to junk status on Friday, compounding the commonwealth’s difficulties as it seeks fresh sources of cash.
It was Puerto Rico’s second downgrade to junk this week after Standard & Poor’s took the same step on Tuesday. Puerto Rico has a number of financial commitments outstanding that require it to make substantial cash payments if two of the three main ratings agencies cut its credit to junk.
The island’s debt problems can have an outsized effect on the rest of the United States because its bonds are unusually widely held by both institutional and individual investors. Its debt is popular because it pays tax-exempt interest in all 50 states, thanks to Puerto Rico’s legal status. Many investors hold the debt without knowing it because tax-exempt mutual funds often include it in their portfolios.
Moody’s said many years of deficit spending and underfunding of public pensions had taken a heavy toll on Puerto Rico, leaving it with a high debt burden and scarce available cash.
“In our view, the commonwealth’s credit profile is no longer consistent with investment-grade characteristics,†the ratings service said in announcing it had cut Puerto Rico’s rating to Ba2 from Baa3, or two notches. It said that it was keeping a negative outlook, indicating that more downgrades were possible.
Moody’s acknowledged steps the Puerto Rican government had taken to strengthen its finances, like cutting back on pensions for government workers, reining in government spending, issuing less debt and promoting economic development.
“While some economic indicators point to a preliminary stabilization, we do not see evidence of economic growth sufficient to reverse the commonwealth’s negative financial trends,†it said.
Moody’s also downgraded the outstanding debt issued by the island’s independent borrowing authority, known as Cofina, although the new ratings were still in the investment-grade range. Officials in Puerto Rico had hoped to expand the Cofina’s borrowing capacity, so that it could bring new bonds to market in the next few weeks.
