PREPA is still likely to default this year and the rejection of a law allowing certain public corporations in Puerto Rico to restructure their debt, which the commonwealth said it would appeal, is credit neutral, Moody's Investors Service said in a comment.
The rejection is neutral because it does not alleviate the fundamental pressures on Puerto Rico's central government, or on its public corporations, which can restructure and default outside of the bankruptcy-like process that the law was meant to provide, Moody's said.
The public corporations subject to the restructuring law included the Puerto Rico Electric Power Authority (PREPA, Caa3/negative), the Puerto Rico Aqueduct and Sewer Authority (Caa1/negative) and the Puerto Rico Highway and Transportation Authority (Caa1/Caa2 negative).
While the law initially had negative implications for Puerto Rico's credit standing, marking the end of the central government's willingness to take steps to ensure payment on the debt of public corporations, its rejection has comparatively little positive credit effect, for two reasons, Moody's said. First, the fundamental financial pressures that led the commonwealth to draft the law have continued to mount since the law was passed. Second, such pressures can lead to bondholder losses even in the absence of the kind of framework that the law sought to establish.
This decision also does not change Moody's view of the likelihood of a PREPA default, which it expects to occur later this year and which is already incorporated in its Caa3 rating. PREPA's financial position and liquidity profile remain weak, and the Puerto Rican economy has structural challenges that together are likely to lead to a PREPA default or restructuring.
