Standard & Poor's on Tuesday lowered its rating on Puerto Rico to "imminent default", saying the US territory intends to pay creditors less than the face value of their bonds.
S&P cut the rating by one notch to "CC" as the Puerto Rican government began a push for holders of some $73 billion in debt to enter talks to lighten the burden.
"This downgrade reflects our view that a default by GDB (Government Development Bank) is a virtual certainty," said S&P analyst Brendan Browne in a statement.
He pointed to a plan by GDB, the government's main debt issuer, to purchase or exchange debt at prices well below their par value.
And GDB also this week made references to "consensual adjustment" on some government debt in a meeting with creditors, after the government announced at the end of June that it cannot fully repay its debt.
"Although the details, including the timing, are unclear at this point, we very likely would classify an exchange offer or similar restructuring as tantamount to default, in line with our criteria, as investors would likely receive less than the par value of the securities," the S&P analyst said.
S&P noted that GDB has nearly $900 million in notes that mature in fiscal 2016, and only $778 million in net liquidity.
S&P put the rating on negative outlook and said it will cut the rating to "SD" or selective default if GDB makes a debt exchange.
The Caribbean island of 3.5 million people, a US territory, has seen its economy contract for seven years.
Last month Governor Alejandro Garcia Padilla said the island would seek to reschedule its debt with creditors in hopes of avoiding a default.