Despite an increasing possibility that the Puerto Rico Sales Tax Financing Corp. (COFINA) will make full debt service payments through 2017, S&P Global Ratings' CC rating with a negative outlook on COFINA's sales tax bond reflect its continued opinion of COFINA's high likelihood of default.
It bases its view on the inclusion of COFINA bonds in the restructuring authority of the recently enacted federal Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA); earlier expressed comments by Governor Alejandro Garcia Padilla that the Commonwealth of Puerto Rico's debt, including that of COFINA, is unpayable; and the view that debt restructuring negotiations will likely resume in earnest after PROMESA control board operations commence and a new gubernatorial administration takes office in January 2017.
In the meanwhile, the commonwealth continues to distribute pledged sales tax to the COFINA bond trustee, even while defaulting on general obligation (GO), various tax-supported bonds, and drawing down bond reserves to avoid default on certain other obligations.
Puerto Rico's default on GO debt, but not on COFINA debt, represents a choice by Gov. Padilla rather than fundamental economic or legal protection enjoyed by COFINA over other types of debt, S&P said. Puerto Rico's debt moratorium law allows the commonwealth to default on both its GO and COFINA obligations, and PROMESA similarly shelters both types of debt temporarily from default lawsuits.
Assuming sales tax distributions continue through the end of December 2016, S&P calculates COFINA's bond trustee likely would have enough money on deposit to make full-year debt service payments through Aug. 1, 2017. COFINA's bond structure captures all pledged revenues in the prior fiscal year beginning July 1 until enough has been collected to make full principal and interest payments on Aug. 1 in the following fiscal year. Sales tax payments made through the end of September 2016 will likely be enough to make the next Feb. 1, 2017, COFINA interest payment on both senior and subordinate debt, while sales tax payments through December would be enough to cover the rest of the year through to Aug. 1, 2017, according to the agency.
COFINA debt service through the Aug. 1, 2017, bond year amounts to $708.5 million, almost all of which consists of interest payments on $15.2 billion of senior and junior debt outstanding, with only $18.7 million of principal to be paid down, according to S&P's information.
Puerto Rico has already distributed $241.3 million of fiscal 2017 sales tax to the COFINA bond trustee through August 2016. Based on historical pledged sales tax of about $120 million per month, payments made through this September should be sufficient to cover the next Feb. 1 COFINA interest payment of $344.9 million, net of federal interest subsidies, according to the agency. Once the initial tax revenues are captured by the Puerto Rico treasury and transmitted to the trustee, the commonwealth is unable to recapture the funds held by the trustee. Puerto Rico's debt moratorium law and required debt service does not currently apply to any remaining reserve funds held by the trustee.
The PROMESA law indicates Puerto Rico should make interest payments on debt outstanding when the control board, in its sole discretion, "determines it is feasible" during a stay of creditors' lawsuits. Once the PROMESA control board comes into full operation, it could create pressure to resume GO bond interest payments, which may make paying down COFINA principal less tenable, despite the currently small scheduled annual COFINA principal payments.
Although Puerto Rico could be pursuing an option to use COFINA as its overall debt restructuring vehicle, S&P believes it would still be difficult to leave COFINA debt out of a comprehensive restructuring settlement, especially as annual COFINA principal payments are scheduled to grow over time and the commonwealth previously proffered COFINA bondholders a larger haircut in restructuring negotiations than those for GO bondholders.
Ultimately, the fate of COFINA debt service will depend on future actions of the control board and the next administration, which may take a number of months to clarify, S&P said.
