On Feb 10, Governor Padilla spoke about the recent Moody's downgrade and his plans to revive the PR economy.

In a nutshell, his team is making great strides to balance the budget and will present a balanced budget in 2015. Improving the rate of tax collections is one leg of the plan and to that end Padilla hinted at a VAT tax as opposed to the existing Sales Tax. A value added tax collects taxes at each stage of the sales process; think baker buys wheat from farmer and pays tax, grocery store buys loaf of bread from baker and pays tax, consumer buys loaf of bread from grocery store and pays tax. The tax paid at each stage is reduced by the amount paid at the prior stage. This mechanism makes tax avoidance very difficult as compared to a sales taxes that is charged to the end user only. A spokesperson for the economic team will likely clarify the Governor's comments so that they are not construed incorrectly or negatively.

There were no surprises to the Moody's downgrade of PR Commonwealth paper to Ba2; citing access to liquidity and economic growth as their main concerns. Unlike SP and Fitch which did not downgrade the Cofina debt, Moody's downgraded Cofina Sr paper from A2 to Baa1. Moody's methodology CAPS the rating differential between GOs and special tax bonds usually to two notches but in this case to four notches. We do not agree with their methodology. Simply, what if the Cofina revenues were ten times more than the debt service, does it make sense to cap the Cofina rating at Baa1 when most securities with these coverage ratios are rated AAA?

The specifics of a new deal will be announced at the Feb 18 investor conference call. We are hearing that it will be up to 3.5 billion in size, have maturities of 15 to 20 years and average lives of 10 to 15 years.