Puerto Rico Default Likelihood 'Approaching 100%,' Moody's Says

WASHINGTON - The probability of a Puerto Rico default that would cause "substantial" losses "is approaching 100%," Moody's Investors Service said.

The rating agency made the statement Wednesday in a report addressing frequently asked questions about Puerto Rico. Moody's said Chapter 9 bankruptcy authorization "would not be sufficient by itself to manage Puerto Rico's current pressures" and that a federal bailout is unlikely.

"Our ratings assume no federal payment on Puerto Rico's debt, and any effort by the government on the commonwealth's behalf would have marginal near-term effects," Moody's analysts said in the report.

The commonwealth is struggling with approximately $72 billion in public debt that Gov. Alejandro Garcia Padilla has said is not payable without restructuring, if the economy doesn't improve. The Puerto Rico Public Finance Corp. on July 15 failed to make a transfer to the trustee for a $93.7 million debt payment due Aug. 1. Moody's said the missed transfer didn't qualify as a default, but was proof that one was coming.

The rating agency said in a default bondholder recoveries "will be lowest on securities lacking explicit contractual or other legal protections," such as bonds from the Infrastructure Finance Authority and Municipal Finance Authority, which are currently rated Ca or Ca with negative outlooks. General obligation bondholders, who are first in line for repayment, have the best chance of recovering money, although Moody's downgraded those bonds to Caa3 with a negative outlook because the commonwealth would have trouble getting fiscal relief if it excludes GO bonds and it has already laid out plans to include GOs in restructuring.

Even if the Chapter 9 powers were allowed for Puerto Rico's entities, as some members of Congress have proposed, the effect would be too limited, Moody's said.

"A bankruptcy filing might provide for a more orderly process with comparatively better recovery rates for a subset of bondholders, excluding direct debt of the central government as well as public corporations unable to show insolvency. Such a partial restructuring might not be worth the effort, in view of Puerto Rico's urgent pressures," Moody's said in the FAQ said. "Since Chapter 9 is unlikely to be a viable way to achieve a consolidated restructuring of all the commonwealth's debt, bankruptcy authorization would not be sufficient, by itself, to manage Puerto Rico's current pressures."

 

The Treasury Department has remained firm that it won't pursue a bailout, and instead has said it would leave any federal response to Congress. Both the House and Senate have bills pending that would allow the territory's municipalities and public corporations to seek bankruptcy protection under Chapter 9, an avenue afforded in states, but there has been no progress to date. The bill in the House was introduced in February and has been sitting in a subcommittee of the House Judiciary Committee since March. The bill in the Senate, introduced last week, was referred to the Senate Judiciary Committee and has not moved.

While Democrats have generally been supportive of the bills, some Republicans have been more reluctant. Senate Judiciary Committee Chairman Chuck Grassley, R-Iowa, has said he would like to see a plan from the commonwealth before moving forward with the legislation. That plan is not expected to come until Sept. 1. Other members of that committee, Sens. John Cornyn, R-Texas, and Orrin Hatch, R-Utah, have said they would be open to the legislation.

 

The rating agency said that Congress could take action to support Puerto Rico besides giving it the ability to use the U.S. Bankruptcy Code, like a federal financial control board or amendments to the Jones Act, which mandates Puerto Rico use expensive U.S. ships for shipping activities. Although groups like the National Taxpayers Union and 60 Plus, a seniors' advocacy group, have pushed for a financial control board, Moody's said establishing one would require high political hurdles.

 

Puerto Rico's fiscal situation will continue to deteriorate, according to Moody's, because the island "lacks an obvious engine of recovery" and faces a continually contracting economy with longstanding immigration away from the island leading to a labor force participation rate of 40% compared to the nation's overall participation rate of 63%.

 

 

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