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Rating Action:

Moody's downgrades $6.8 billion Puerto Rico Senior Sales Tax Revenue Bonds to Aa3 from Aa2 and downgrades $9.2 billion subordinate bonds to A3 from A1

18 Jul 2012

Outlook is stable

New York, July 18, 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.

SUMMARY RATING RATIONALE

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.

STRENGTHS

* 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.

CHALLENGES

* 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.

WHAT COULD MAKE THE RATING GO UP

-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

WHAT COULD MAKE THE RATING GO DOWN

-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

The principal methodology used in this rating was US Public Finance Special Tax Methodology published in March 2012. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

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Lisa Heller
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Emily Raimes
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
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New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades $6.8 billion Puerto Rico Senior Sales Tax Revenue Bonds to Aa3 from Aa2 and downgrades $9.2 billion subordinate bonds to A3 from A1
No Related Data.
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