Puerto Rico authority bonds plummet to Ba from A; Moody's cites persisting fiscal woes.

BOSTON -- The Puerto Rico Port Authority was downgraded four notches to Ba from A by Moody's Investors Service yesterday due to the authority's "pronounced fiscal deterioration," over the past three years, rating agency officials said.

Moody's said that "while the authority has recently begun to implement remedial measures [to improve its finances], it is not clear if these have come soon enough or, in their present form, will be sufficient."

This downgrade from a strong investment-grade credit to junk bond status comes less than a week after Standard & Poor's Corp. placed the authority's debt on CreditWatch with negative implications. Standard & Poor's left the authority's rating at A-minus.

The Port Authority currently has about $52 million of outstanding uninsured debt and about $84 million in debt insured by Financial Guaranty Insurance Co.

The authority is responsible for the development and operation of the island's airport and maritime facilities.

"The most important reason for the downgrade was the authority's cash position," said Steven Hochman, a vice president and assistant director at Moody's.

The authority's cash position has declined so rapidly that by the end of this month the authority expects that its bank overdrafts will reach $14.1 million versus accounts payable of $69.8 million.

Those two figures represent 89% of all revenues that the authority realized during fiscal 1994, Hochman said.

So far, the authority has managed to meet its debt service obligations without dipping into its debt service reserve fund.

Additionally, a release from the rating agency said that for the past two fiscal years, the authority has violated its bond covenant. The authority's covenant requires that revenues cover debt service requirements by no less than 1.25 times.

During fiscal years 1993 and 1994, the authority provided coverage of only 0.13 times and 0.34 times, respectively.

Moody's also said the authority's current rate and fee structure is inadequate to improve the authority's cash position.

At the end of last month, the authority said that a new rate system would go into place. Following that announcement, Gov. Pedro Rossello said that a state of emergency existed at the authority.

Under the state of emergency, the authority is not bound by the standard waiting period before it can raise rates. Normally, if an entity in Puerto Rico wants to increase rates or fees, it must wait 30 days following the announcement.

The state of emergency will allow the authority to raise rates on Jan. 1.

The authority announced it will increase rates for both the maritime and airport divisions. Rates will be reviewed on an annual basis instead of every three years.

While Standard & Poor's said the government's dedication to the authority was a major reason for not downgrading the credit, Moody's said they were less convinced the plan will be fully implemented without delay.

"The Puerto Rico Shipping Authority has already threatened the authority with a lawsuit against the new rates," Hochman said. "While there has not been a specific threat against the authority by the airline industry, that could also occur."

Hochman said that if the steps taken by the authority move without interruption and show a positive result, then the agency will take a second look at the credit.

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