Puerto Rico may get access to the financing that it needs after all, but not through traditional debt markets. Morgan Stanley (NYSE:MS) has been in touch with hedge funds, private equity firms, and other major investors trying to put together $2 billion for the troubled US territory, but the yield could be as high as 10%, far higher than the rates available in the broader municipal bond market, reports Michael Corkery for The New York Times.

Puerto Rico Muni

Puerto Rico’s financial problems are nothing new, but it is now facing a credit downgrade from Moody’s Corporation (NYSE:MCO), who insisted that Puerto Rico prove that it can still raise financing when necessary. Moody’s cited “weakening liquidity, increasing reliance on external short-term debt, and constrained market access, within the context of a weakened and now sluggish economy” as cause for a possible downgrade from BAA3 to junk bond status.

Puerto Rico says it has enough cash to last until June 30

Puerto Rico claims that it has enough cash to make it through the end of June, and wants to put off taking on expensive debt, for obvious reasons. While there have been some initial signs that Puerto Rico is finally pulling out of its long recession, the markets are still looking for some reassurance that it isn’t going to go bankrupt. If Puerto Rico chooses not to take on the additional debt and risks the downgrade, it could be forced to push forward payments and put down more collateral – even if it’s balance sheet really is stable today, it probably can’t survive a downgrade.

Importance of pensions continues to grow

The muni bond market must be thinking about Detroit’s decision to go bankrupt last year, amid concerns that bankruptcy could become a more common reaction to high levels of debt. A second bankruptcy in such a short time period could raise concerns about cities’ ability to pay for pensions that in many cases are still ballooning. In the short term, there probably aren’t that many other cities that can file Chapter 9 bankruptcy, since it’s necessary to prove that obligations will be unmet in the near future, not just that the local government is insolvent in the long term. Still, you can expect investors to put even more emphasis on pensions when looking at other municipalities’ balance sheets in the future