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Moody's drops Puerto Rico Electric Power bonds to junk

Monday, 10 Feb 2014 | 12:14 PM ET

NEW YORK, Feb 10 (Reuters) - Moody's Investors Service confirmed on Monday it had cut the rating of the Puerto Rico Electric Power Authority to junk status, saying the island's shrinking economy and population will hurt the already cash-strapped authority's ability to invest.

The downgrade was made late on Friday several hours after Moody's cut the fiscally challenged U.S. territory's general obligation rating to Ba2, two notches below investment grade.

Moody's said that downgrade contributed to the decision to drop the rating on $8.8 billion in PREPA power revenue bonds to Ba2, down from their previous investment grade rating of Baa3.

"PREPA's rating is closely tied to the rating of the commonwealth given its reliance on Government Development Bank as a source of working capital liquidity as well as the importance of revenues from municipal authorities (estimated at 13 percent of PREPA's revenues)," Moody's said in a statement.

"Moreover, the continued weakness in the economy of Puerto Rico, including the lack of economic growth drivers and negative demographic trends, weigh heavily on today's rating action and on PREPA's ability to meet numerous strategic initiatives."

Moody's also highlighted PREPA's tight liquidity situation - it said the agency had just 11 days worth of cash on hand for year-end 2013 - and said its earnings were only just enough to cover interest on outstanding debt.

That is not likely to change, Moody's said, particularly given high electric rates, the weak economy and PREPA's need to finance important capital expenditures with debt.

PREPA's woes reflect those of Puerto Rico as a whole. With some $70 billion of tax-free debt - nearly four times the $18 billion owed by bankrupt Detroit - Puerto Rico has struggled to climb out of a multi-year recession and get a handle on a chronic budget shortfall.

Moody's downgrade of the commonwealth followed an earlier one by Standard & Poor's. That has raised concern in financial markets that the government may have to restructure its debt.

In a separate report dated Feb. 3, Moody's said that one of its market-based measures indicated that Puerto Rico was at a greater risk of defaulting within the next year than all 50 U.S. states and sovereign issuers save Argentina and Venezuela.

The government has said it wants to balance the budget by fiscal year 2015 and has raised taxes, cut spending and passed reforms of its pension system, which are now under court review.

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