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Puerto Rico Downgraded to Junk at Moody’s

Jon C. Ogg

We have already seen that Standard & Poor's had downgraded Puerto Rico to junk bond status from investment grade. Now we have the same call coming from one of the other top ratings agencies. Moody's downgraded Puerto Rico to Ba2 from Baa3, and similar to S&P the firm also kept its Negative outlook on the island nation.

Friday's downgrade will not have the same impact as the S&P downgrade. After all, if it was cut to junk at one of the top three ratings agencies, then investors at most buy-side firms and money management firms will have made their adjustments and followed their respective investment policies around holdings of rated securities.

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The Moody's downgrade pertains to the general obligation bonds, which effectively triggers downgrades on all the subsequent notes and bonds under the nation as well. Moody's downgraded the country's notched bonds to Ba3 and COFINA bonds to Baa1, Baa2.

The Moody's downgrade said,

"The problems that confront the commonwealth are many years in the making, and include years of deficit financing, pension underfunding, and budgetary imbalance, along with seven years of economic recession. These factors have now put the commonwealth in a position where its debt load and fixed costs are high, its liquidity is narrow, and its market access has become constrained. In the face of these problems, the administration has taken strong and aggressive actions to control spending, reform the retirement systems, reduce debt issuance, and promote economic development. Despite these accomplishments, however, in our view the commonwealth's credit profile is no longer consistent with investment grade characteristics."

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There is much overlap in the Moody's note compared to the S&P note.

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