Standard & Poor's Ratings Services said it has affirmed its BB general obligation and BB-minus appropriation ratings on the commonwealth of Puerto Rico following an examination of Puerto Rico's enacted fiscal 2015 budget, updated quarterly disclosure, and current and projected liquidity position.
The outlook is negative.
"We believe that the combined cash position of the commonwealth and the Government Development Bank, which provides liquidity to the commonwealth and plans to assist Puerto Rico in its tax and revenue note cash flow financing, is currently adequate for the assigned speculative-grade rating based on our view of Puerto Rico's projections," said Standard & Poor's credit analyst David Hitchcock. The current speculative-grade ratings and negative outlook continue to reflect our opinion of the commonwealth's ongoing fiscal pressures. "We are concerned about several of the risks outlined in the July quarterly disclosure report, which we believe continue to point to Puerto Rico's weakened ability and willingness to repay its debt obligations," Hitchcock added.
The agency also affirmed the BBB ratings on Puerto Rico Sales Tax Financing Corp.'s (COFINA) first-lien sales tax-secured debt and the BBB-minus ratings on COFINA's second-lien sales tax-secured debt based on strong legal protections on the security of pledged sales tax revenues, tempered by the potential for a decreased willingness to pay either GO or COFINA debt given a choice between paying governmental functions and debt repayment if general fund liquidity worsened significantly.
Its rating on rum tax and hotel tax debt is also affirmed and remains on a par with the GO rating, based on the potential diversion of revenue in favor of GO bondholders under the Puerto Rico Constitution, while the rating on the Highways and Transportation Authority is affirmed at B due to the authority being potentially subject to Puerto Rico's recent debt restructuring act for public corporations. The outlook on all of these ratings is negative.
The agency anticipated the commonwealth would have been in a position to exhibit a stronger commitment to its GO debt obligations after having obtained $3.5 billion in financing -- an amount well above what it had previously indicated would be necessary to fund its operations for the current and next fiscal years. In addition, the recently enacted restructuring legislation was intended to erect a level of protection around the commonwealth's GO bonds.
Instead, there are risks relating to timely repayment of debt, which risks continue to be a significant focus of disclosure. The commonwealth indicates that, despite this disclosure, it is firmly committed to servicing its GO and other tax-supported obligations and has provided updated liquidity information to support this.
The negative outlook reflects Puerto Rico's weak economic trends, strained finances, a scheduled increase in debt service in fiscal 2016, continued deferred pension payments, and the potential difficulty in accessing the market for liquidity purposes if unanticipated budget shortfalls develop.
In particular, lower-than-forecast revenue collections in fiscal 2015 could pose near-term problems over the one-year outlook horizon. If additional liquidity pressure develops that could create a reduced willingness in the commonwealth to repay creditors in order to preserve other governmental functions, the ratings could be lowered.
