Moody's Investors Service said it has downgraded the commonwealth of Puerto Rico to B2 from Ba2, affecting $14.4 billion of outstanding general obligation bonds.
Concurrently, commonwealth agencies and public corporations have been downgraded, affecting about $46 billion of non-GO bonds, including $15.6 billion of senior- and subordinate-lien bonds issued by the Sales-Tax Financing Corporation (COFINA), which respectively were lowered to Ba3 and B1.
The Puerto Rico Electric Power Authority (PREPA) was downgraded to Caa2 from Ba3, while the Puerto Rico Aqueduct and Sewer Authority (PRASA) was downgraded to Caa1 from Ba3. The Puerto Rico Highway and Transportation Authority (PRHTA) was downgraded to Caa1 (senior 1998 resolution and 1968 resolution) from Ba3, and to Caa2 from B1 (subordinate 1998 resolution).
For PREPA, PRHTA and PRASA, the newly lowered ratings remain under review for possible further downgrade. The debt of the Government Development Bank (GDB) was downgraded to B3 from Ba2, and the debt of the University of Puerto Rico was downgraded to Caa1 and Caa2.
The outlook for the GDB as well as for commonwealth GO and related debt remains negative.
The downgrades of Puerto Rico and its debt-issuing entities follow the commonwealth's enactment of a law (the Puerto Rico Public Corporation Debt Enforcement and Recovery Act) that will allow public corporations to defer or reduce payments on outstanding bonds. By providing for defaults by certain issuers that the central government has long supported, Puerto Rico's new law marks the end of the commonwealth's long history of taking actions needed to support its debt. It signals a depleted capacity for revenue increases and austerity measures, and a new preference for shifting fiscal pressures to creditors, which, has implications for all of Puerto Rico's debt, including that of the central government.
Application of the law may further limit the commonwealth's market access, leaving it more vulnerable to financial risk and unable to fund capital projects.
The COFINA ratings have now been positioned closer to the GO, reflecting their increased susceptibility to any action that impairs bondholders' claims on sales tax revenues if the commonwealth invokes its police powers and acts to protect the health and safety of the general public ahead of bondholders. The new GO and COFINA bond ratings face heightened risk of default, given the commonwealth's stagnant economic conditions and disproportionately large debt burden.
Ratings now assigned to PREPA, PRASA and PRHTA and the Puerto Rico Convention Center District Authority are under review for further downgrade, reflect the escalating risk that these entities could default voluntarily under the new restructuring law.
Moody's also lowered ratings on certain bonds previously considered as equivalent to the general obligation rating, or "capped" at the GO rating, because of their increased risk of default and potentially lower recovery rates than the GO. The ratings on Puerto Rico's pension funding bonds, as well as debt issued by the GDB and the Municipal Finance Agency, and the Puerto Rico Infrastructure Financing Authority (PRIFA, bonds secured by rum tax remittances from the federal government) were downgraded to B3 from Ba2 and are now rated one notch below the GO bonds due to the view that the expected loss rates on these securities are now higher. GDB has direct exposure to the risks implicit in the restructuring law, given its substantial loans to PRHTA and other public corporations.
