Fitch Ratings downgraded Puerto Rico's general obligation bonds to B from BB-minus on Thursday, citing concerns about the commonwealth's ability to sell a bond to increase liquidity and the legislature's willingness to pay back the commonwealth's debt.
Fitch dropped related bonds to B from BB-minus. All the ratings are on rating watch negative.
Fitch downgraded the senior lien revenue bonds of the Puerto Rico Aqueduct and Sewer Authority to B from B-plus. The authority is expected to sell a bond in the next few months.
Fitch's downgrades affect a total of $36.6 billion of outstanding debt.
"The downgrade and negative watch reflect elevated concerns regarding both the ability of the Commonwealth [of Puerto Rico] to execute a financing to bolster the liquidity cushion of the Government Development Bank (GDB), and thereby that of the commonwealth, and the willingness to pay on the part of the legislature," Fitch managing director Laura Porter wrote. "These issues are clearly related, as Fitch believes that recent statements and actions by the legislature that would result in an abrogation of the commonwealth's commitments to general government bondholders have increased the challenges to a successful Puerto Rico Infrastructure Finance Authority (PRIFA) financing and, at a minimum, are likely to result in an increase in already elevated borrowing costs."
In the next few weeks PRIFA is expected to sell a bond for up to $2.95 billion that would improve the GDB's liquidity and pay off the debt of the Puerto Rico Highways and Transportation Authority to the GDB.
Puerto Rico has made progress towards a balanced budget since selling a $3.5 billion bond in March 2014, Porter said. However, there are indications that the legislature is no longer is committed to taking steps to balance the budget or support debt service payments.
In mid-March some members of the legislature submitted a proposal to amend the Puerto Rico constitution's first lien for debt on the commonwealth's revenues. This week legislators submitted another proposal to introduce a large tax on the interest on bonds issued by Puerto Rico's public corporations and other public entities.
While the legislature has passed measures making the anticipated PRIFA bond more attractive to buyers and augmenting revenues in the current fiscal year, the negative effects of proposals in the legislature outweigh the positive implications for Puerto Rico's credit, Porter said.
Puerto Rico is working on a tax reform, which could turn out to be credit negative or credit positive, Porter said. It now appears that the enacted reform will differ significantly from the governor's proposal.
Porter says the GDB's liquidity has deteriorated.
However, the GDB's liquidity has gone up in the last two months. As of Feb. 28 it was $1.23 billion. Assuming the liquidity supports the commonwealth's General Fund, PRASA's budget, PRHTA's budget, and the budget of the Puerto Rico Electric Power Authority, this total would amount to about 27.8 days of liquidity.
By comparison in a report the Pew Center for the States released in January it said the median size of reserves in the 50 states was 24 days.
Porter said the Pew Center figures do not reflect all the money that states have to pay their bills.
The rating agency has all but three states in the double-A category.
Puerto Rico's general obligation bonds are currently rated B by Standard & Poor's and Caa1 by Moody's Investors Service.
