Moody's Investors Service has downgraded the Commonwealth of Puerto Rico's general obligation (GO) and guaranteed bonds as well as its senior lien Sales Tax Financing Corporation (Sr COFINA) bonds to Caa3 from Caa2. We also lowered ratings assigned to other securities, including bonds of the Puerto Rico Aqueduct and Sewer Authority, which also were downgraded to Caa3 from Caa2. Bonds already in the Ca category were affirmed at that level. In all, about $55.5 billion was affected by these actions. With today's GO rating action, the seventh downgrade in the past five years, the commonwealth's rating has declined 12 notches since 2011. The outlook for all affected securities remains negative.
SUMMARY RATING RATIONALE
Governor Alejandro Garcia Padilla's declaration that the commonwealth cannot pay its debt, the suspension of a law requiring monthly general obligation debt service deposits and the decision to devise broad
restructuring plans are clear signs that holders of even those Puerto Rico securities with strong legal protections face significant loss. While our ratings still indicate higher recovery rates for the GO and senior COFINA bonds than for other Puerto Rico government and public corporation securities, it appears unlikely that a limited restructuring excluding those better-protected bonds will be sufficient for Puerto Rico to gain the relief desired. This is consistent with the fact that the GO and COFINA bonds account for a very large share of Puerto Rico's debt.
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 point to recovery prospects at the low end of estimates. Efforts to right-size a debt burden that has become overwhelming, following years of deficit financing and economic stagnation, probably will trigger a long and litigious process, perhaps heightening bondholder loss prospects. We will adjust ratings as needed to the extent that recovery rates appear to diverge from those implied by our ratings.
