Thursday, July 19, 2012


Moody's cuts Puerto Rico Sales Tax Financing Corp 

Puerto Rico sales tax revs, subordinate debt cut-Moody's
July 18, 2012

Puerto Rico's senior sales tax revenue bonds were downgraded to Aa3 from Aa2 and while subordinate bonds were cut to A3 from A1 because the commonwealth's economy likely will underperform that of the United States, Moody's Investors Service said in a statement on Wednesday.

The outlook is stable for the $6.8 billion of sales tax bonds and the $9.2 billion of subordinate bonds, the credit ratings agency added



Moody's cuts Puerto Rico Sales Tax Financing Corp
July 19, 2012
Moody's Investors Service has downgraded the Puerto Rico Sales Tax Financing Corporation's (COFINA) outstanding senior sales tax revenue bonds to Aa3 from Aa2 and outstanding subordinate sales tax revenue bonds to A3 from A1 . The rating changes impact $16 billion of outstanding bonds. 

-The downgrades reflect our view of the increased risk in the bonds' escalating debt service structure as a result of the effects on Puerto Rico's economy of the extended recession coupled with structural changes in the manufacturing sector due to the phase-out of territorial tax benefits and exposure to greater global competitive forces. 

The combined result is that the commonwealth's economy is expected to underperform compared to the US economy, decreasing the likelihood that sales tax collections will achieve the growth necessary to maintain levels of debt service coverage consistent with prior rating levels and compared with other credits at that rating level. The senior bonds were downgraded by one notch to Aa3 to reflect our expectation that coverage will decline in the future to levels more consistent with the new rating level. 

The rating on the subordinate bonds was lowered by two notches, to A3, to reflect our expectation that the lower revenue growth rate will make total debt service coverage narrow considerably. The rating also reflects the bonds' strong legal structure which includes the first right to certain sales taxes collected in the Commonwealth of Puerto Rico, a collection mechanism that separates those monies from the General Fund, a non-impairment covenant by the commonwealth and an effectively closed lien. 

We note that revenue collections have been below initial projections even though enforcement of the tax has recently improved significantly. 

-A strong legal structure, including a pledge of the larger of a fixed Base Amount each year or 2.75% of the first dollars collected of the commonwealth's 7% sales tax, and a collection mechanism that segregates those monies from the General Fund. * A broad and diversified economic base that supports the sales tax pledge, including many products and services, but excluding the more volatile sectors of automobiles and energy, and demonstrated long-term growth of personal consumption expenditures. * Non-impairment covenant by the commonwealth; legal opinions that the pledged sales tax revenues are not available to its General Fund. 

-Escalating debt service structure requires growth in revenues to meet all debt service in the future. * Expected declining coverage. * Legislature could change the sales tax to decrease available revenues, although subsequent legislation made this more difficult. * Collection rates have historically been estimated at around 60% (although enforcement has recently improved). * Long maturities (senior bonds have 45-year final maturity) Outlook The rating outlook for the Sales Tax Revenue Bonds is stable. The outlook reflects our expectation that sales tax revenue growth will continue as enforcement efforts proceed, and that in the long term the sales tax collections will grow at a rate sufficient to maintain strong coverage of senior debt service and adequate coverage of total COFINA debt service. The outlook also reflects the legal and structural insulation of COFINA from the general finances of the commonwealth. 

-Dramatic growth in sales tax revenues, leading to a significant increase in coverage -Increase in the sales tax rate without increasing ability to leverage bonds 

-Decline in sales tax revenues, leading to decreased coverage -Legislative change to sales tax that decreases available revenues -Significant deterioration in the credit strength of the Commonwealth of Puerto Rico causing significant economic dislocation