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Puerto Rico could eliminate tax that backs some bonds

Tuesday, 11 February 2014   (0 Comments)
Posted by: Author: Reuters
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Author: Reuters

Puerto Rico Gov. Alejandro García Padilla said on Monday a tax reform his administration is analyzing could eliminate the sales and use tax, which is the repayment source for Puerto Rico's highest-rated revenue bonds.

Sales-tax backed debt, known as Cofina bonds for the issuing agency's Spanish acronym, totals an estimated $15.5 billion. Sales-tax bonds may be part of a new debt offering being considered by the cash-strapped Caribbean island.

Moody's Investors Service last week lowered the commonwealth's credit rating to junk status and also cut the rating on the Cofina debt because of worries about the island's shrinking economy and population. The Cofina bonds, however, remain investment grade.

"The study will include the re-evaluation of the... tax to ponder if it is really the best alternative for everybody, taking into account the debt that has been borrowed against this funding source," the governor said during a televised address in which he reviewed steps his government has taken to improve public finances and the economy of the U.S. territory.

Puerto Rico has roughly $70 billion in total debt and has in the last week been downgraded by two major U.S. credit ratings agencies. A third is considering a similar move.

To shore up its budget, the government has reformed public pensions and hiked taxes, drawing court opposition and angering many residents in the struggling island economy.

Some Cofina bonds fell after Garcia Padilla's announcement, with a 2039 maturity carrying a 6 percent coupon dipping as low as 68.5 cents on the dollar from 73 cents earlier on Monday. It later bounced back to 73 cents. A 2037 maturity with a 5.5 percent coupon fell to 71 cents on the dollar from 73.5 cents before the news, according to Municipal Market Data.

Garcia Padilla said he expects to have the results of the study on a tax reform by year's end.

The measures the government has taken include reducing by $170 million the current year's deficit, delivering a balanced budget next year, renegotiating loans whose payments were accelerated by last week's downgrade and increasing tax enforcement efforts.

The legislature has also passed pension reforms, which are now under court review, and hiked taxes, which has raised the ire of residents in the struggling economy.

"Whoever doubts that Puerto Rico will get through this stronger than ever does not know Puerto Ricans. We are standing, united and ready to fix our finances," Garcia Padilla said.

The governor said that as his administration delivers balanced budgets, public corporations will be completely responsible for their finances and will not be able to depend on the central government for subsidies.

The federal government has repeatedly said it will not come to the rescue of the fiscally challenged territory. 

This article first appeared on



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