The chances that the commonwealth of Puerto Rico and its Government Development Bank (GDB) will not have the liquidity they are forecasting are significant and growing, says Moody's Investors Service.
Moody's views the liquidity as currently forecasted by the GDB, Puerto Rico's fiscal agent, as narrow but marginally sufficient for the commonwealth's current B2 rating.
The GDB is forecasting declining, but marginally adequate, liquidity through the end of fiscal 2015, which ends June 30, 2015, with $1.68 billion in cash available at that date.
Moody's adjusted scenario, reflecting downside risks to the forecast, shows near-total depletion of available liquidity by June 30. A more rapid drop in cash balances than the GDB anticipates would further pressure the commonwealth's credit ratings.
The downside risks to the forecast include possible cash outlays to support public corporations despite passage of the new debt restructuring law, tax revenue shortfalls, and the difficulty the commonwealth would likely face if it turned to the capital markets for another liquidity boost, Moody's explains in the report, "Puerto Rico's Liquidity Remains at Risk Despite Recent Borrowing and Restructuring Law."
On June 28, the commonwealth enacted legislation permitting certain public corporations -- including those that provide the island's essential electric, transportation and water and sewer service -- to restructure their debt, which could include default on bonds. The law aims to end these corporations' frequent reliance on financial support from the central government, through the GDB.
Moody's believes the benefits of the restructuring law to the commonwealth may be somewhat limited. First, debt defaults under the law will further hamper market access, preventing or limiting transactions that could otherwise replenish GDB liquidity. Second, even if the public corporations are able to shrink debt service burdens by imposing new terms on creditors, the public corporations may still need more financial assistance to continue operations.
Revenue shortfalls are another key risk to the GDP's forecast. For fiscal 2014 the commonwealth reported a preliminary general fund shortfall of $488 million, or 5% versus budget. Moody's projects that a 5% shortfall in general funds would almost deplete liquidity in March 2015, when only $212 million in available cash would remain.
"Given the commonwealth's increasing credit pressures, its ability to find buyers for new public debt offerings has deteriorated since March, when it sold $3.5 billion of general obligation bonds," says Moody's Ted Hampton, who wrote the report.
