Moody's Investors Service has downgraded the commonwealth of Puerto Rico's general obligation bonds and guaranteed debt to Caa1 from B2, its Sales Tax Financing Corporation (COFINA) senior and subordinate bonds, respectively, to B3 and Caa1 from Ba3 and B1, and the notes of the Government Development Bank for Puerto Rico, to Caa1 from B3.
Additionally, the Puerto Rico Highway and Transportation Authority's senior bonds were downgraded to Caa2 from Caa1, while ratings on the Puerto Rico Aqueduct and Sewer Authority (PRASA) have been affirmed at Caa1, in connection with this action.
A negative outlook has been maintained for all of Puerto Rico's governmental and public corporation debt.
Tax revenue shortfalls attributable to sluggish economic growth may accelerate the depletion of Puerto Rico's already very narrow liquidity, leaving the commonwealth unprepared to manage substantial growth in debt payments in the fiscal year starting July 1.
Continued liquidity for operations and debt repayment depends on access to a small lender group.
Tax reforms now before the legislature, which are uncertain in their timing and their results, further signal a rising degree of political risk that could ultimately cause outcomes unfavorable to bondholders.
These factors have increased the probability of default on GDB, GO, COFINA and other central government debt to a high level, during the next two years. Downgrades of some ratings to Caa2, a notch below the commonwealth's GO rating, reflect the vulnerability of pledged revenues to a constitutional provision that provides a claim in favor of general obligation bondholders.
At the same time, it sees no material increase in risks associated with PRASA.
The outlook for Puerto Rico remains negative. Weakening liquidity and economic deterioration may put increasing pressure on the commonwealth's credit position in coming months, heightening the risk of default on central government obligations. Efforts to access the capital market, if successful, may bolster liquidity in the short term but will not address fundamental economic and fiscal stress.
Significant tax reforms may have a longer-term fiscal benefit, but also signal the difficulty of meeting all obligations in the near term under the current fiscal structure.
What Could Make the Rating Go Down
Indications that the commonwealth is actively considering debt restructuring or other strategies that would lead to default.
Significant further weakening of GDB liquidity.
Decline in revenues caused by economic or other factors.
