Moody's Investors Service has downgraded $1.09 billion of Puerto Rico appropriation bonds issued by the Public Finance Corporation (PFC) to C from Ca, while maintaining other ratings assigned to the US territory's debt. The commonwealth's general obligation (GO) rating is Caa3. The PFC bonds' downgrade factors in the diminishing recovery prospects for these securities compared with other commonwealth obligations, given the repeated missed payments since this summer, and bondholders' limited legal recourse. The path to resolution of the commonwealth's debt and liquidity crisis remains unknown. Recent events suggest federal intervention of some type is likely, although implications for bondholders are unclear.
Widespread losses affecting all of the commonwealth's debt still appear likely, but GO and certain other obligations with stronger legal foundations will likely yield substantially higher principal and interest recovery.
Rating Outlook
The outlook for Puerto Rico and its related debt remains negative, in view of dwindling liquidity and economic stagnation, which point to debt service recoveries at the low end of estimates. Efforts to reduce a debt burden that has become overwhelming after years of deficit financing and economic contraction may trigger litigation that further undermines economic growth and, in turn, reduces overall bondholder recovery prospects.
