Moody's Investors Service has downgraded the Government Development Bank for Puerto Rico's notes to Ca from Caa1, the Commonwealth of Puerto Rico's general obligation and guaranteed bonds to Caa2 from Caa1, and other affiliated credits by two notches in most cases. In all, about $54.8 billion was affected by these actions, and a list of rating changes is at the end of this report. Included in the total debt affected are $15.2 billion of Sales Tax Financing Corporation (or COFINA) bonds. COFINA's senior debt was downgraded to Caa2 from B3, and its subordinate-lien obligations were lowered to Caa3 from Caa1. The
outlook for all affected securities remains negative.
SUMMARY RATING RATIONALE
According to recent disclosures, cash resources at the GDB may be fully depleted by the end of August in the absence of market access or emergency actions to preserve cash. GDB faces a 53% debt-service surge
in the fiscal year starting July 1, and deposit withdrawals by the Puerto Rico Electric Power Authority (Caa3 negative) and the Puerto Rico Housing Administration in coming weeks will accelerate GDB's liquidity erosion. We believe that the commonwealth will not be able to complete its planned financing (which was to replenish cash at the GDB) before the end of the fiscal year, and that Puerto Rico and the GDB will be forced to pursue cash-conservation measures such as seeking to defer principal repayment to holders of bonds that are not protected by the strongest revenue pledges or constitutional provisions, such as GDB notes and the government's subject-to-appropriation debt. As a consequence, ratings on Puerto Rico's unprotected securities have dropped to levels consistent with substantial expected losses. The legally protected securities - notably, the government's general obligation and Sales Tax Financing Corp. (COFINA) bonds - are also affected by rising default risk, given that they account for a significant majority of the commonwealth's tax-supported debt burden. The higher ratings assigned to the GO and COFINA credits incorporate their legal protections and the government's
OUTLOOK
The outlook for Puerto Rico and its related debt remains negative, because of trends such as weakening liquidity and economic deterioration, which we believe may further heighten default probabilities and further reduce bondholder recovery prospects in coming months.
