The filing by Republican lawmakers of two bills in the U.S. Congress that could assist Puerto Rico during its current financial crisis does not result in a change to Standard & Poor's Ratings Services' credit rating or outlook (CC/Negative) due what it sees as the uncertain chances for enactment of these bills.
However, the current rating does not assume large-scale federal aid for debt relief. If the bill filed by Senator Orrin Hatch were enacted in its present form, it could have somewhat favorable credit implications for payment of debt in the near term, the agency said.
The Hatch bill would provide up to $3 billion of new federal funds to broadly "assist the transition of the Commonwealth to financial, fiscal, economic, and health care stability," as well as reduce federal payroll taxes for five years.
The federal government would fund the $3 billion liquidity relief for the Commonwealth from reallocation of existing Affordable Care Act (ACA) money that would otherwise go to existing ACA uses.
This funding provision will likely create Congressional resistance to passage, according to the rating agency. The money would only be available to Puerto Rico in the federal fiscal year ending Sept. 30, 2016, S&P said.
$3 billion of special assistance would provide significant near-term liquidity improvement to Puerto Rico, although such one-time funds would not necessarily close Puerto Rico's structural fiscal imbalance or create the economic growth that the rating agency believes Puerto Rico needs to restore long-run stability.
A $3 billion liquidity injection is equivalent to more than the last two years of Commonwealth operating deficits. The Commonwealth's last (Nov. 6) disclosure statement projected a peak consolidated summary cash deficit of $755 million at the June 30, 2016, end of the current fiscal year, although the rating agency views the Commonwealth's summary cash projections as holding significant uncertainty due to lack of detail in how they were calculated, a track record of missed budget projections, and the lack of audited financial statements since fiscal 2013.
The Commonwealth was able to operate in fiscal 2015 through the sale of $1.5 billion of external cash flow notes in the first part of the fiscal year, although S&P believes liquidity has been subsequently weakened as the result of a $703 million fiscal 2015 operating deficit realized at the end of fiscal 2015, and the Commonwealth's projection of a $355 million revenue shortfall in fiscal 2016 that it is currently attempting to address with mid-year budget adjustments.
The Hatch bill would also create a new federally appointed control board with the power to withhold federal funds to Puerto Rico if it did not comply with control board financial recommendations, although the control board could not unilaterally impose spending cuts. The bill would also facilitate improved financial reporting by granting the control board direct access to federal and Commonwealth fiscal- and pension-related records and information systems, as well as the ability to provide technical assistance and recommendations. Over time, this could improve what the agency sees as Puerto Rico's currently poor financial reporting, potentially alleviating a contributing factor to the Commonwealth's weak credit profile.
A separate bill, introduced into the U.S. House of Representatives by Sean Duffy, does not provide direct federal money or reduce payroll taxes as in the Senate bill, but would allow the extension of federal Chapter 9 bankruptcy authorization to Puerto Rico as currently authorized for the states, once its financial monitoring authority is established.
The Duffy bill's control board would also not have the power to impose unilateral spending cuts. The Duffy bill, if enacted, could hasten default on non-GO tax-secured public corporation debt by allowing Chapter 9 filing in advance of outright default on debt service, S&P said. The Duffy bill could also weaken creditors' post-default recovery position.
The Duffy bill is unlikely to pass due to the inclusion of the bankruptcy authorization, especially as the Hatch bill, sponsored by three Senate committee chairmen, does not include bankruptcy authorization, according to the rating agency.
Puerto Rico appears to have an improved, if uncertain, prospect of making its Jan. 1 GO bond interest payment, aided by the diversion of revenue that would otherwise go to pay certain tax-backed revenue bonds, but worse prospects for making its following July 1 larger debt service payments and beyond, the rating agency said.
In essence, it sees Puerto Rico as now using tax-backed bond debt service reserves as another source of cash flow liquidity, temporarily avoiding outright default on GO, Highways and Transportation Authority, and Convention Center District Authority debt, as other sources of liquidity become exhausted. Whether these non-GO bonds default a year from now will depend on whether Puerto Rico is able to restore these bond reserves when Commonwealth cash flow temporarily improves in the first half of calendar 2016 beginning in mid-January, assuming no special federal aid. However, payment of GO principal and interest on July 1 debt service payments may be problematical under current Commonwealth cash flow projections, even with the diversion of non-GO tax-secured bond revenue, again assuming no special federal aid.
There is limited political willingness on the part of the governor and legislature at the present time for additional major spending reductions, the rating agency said. Combined with current lackluster economic results, structural balance seems unlikely for the foreseeable future as projected debt, pension, and health care costs rise, regardless of whether $3 billion of one-time financial assistance is received. In its view, rapidly rising pension and health care costs will be likely prioritized above debt service.
Based solely on the developments described herein, S&P determined that no rating actions are currently warranted.
