Standard & Poor's Ratings Services said it has affirmed its CC rating on various issues of the commonwealth of Puerto Rico's tax-backed debt not currently in default.
The affirmed ratings includes those on Puerto Rico general obligation debt and general fund appropriation secured debt, excluding already defaulted debt of the Puerto Rico Public Finance Corp. (PFC), currently rated D.
Standard & Poor's said it has also affirmed its CC rating on Puerto Rico Sales Tax Financing Corp. (COFINA) debt, Puerto Rico Convention Center District Authority (CCD) debt, and Puerto Rico Highways and Transportation Authority (HTA) debt. The outlook on all debt is negative.
"We rate debt CC when we expect default to be a virtual certainty, regardless of the anticipated time to default," said Standard & Poor's credit analyst David Hitchcock. "In our view, all of Puerto Rico's tax-backed debt is highly vulnerable to nonpayment."
Standard & Poor's believes a default or restructuring is highly likely and could take the form of either a missed debt service payment or a distressed exchange that it would characterize as a default. Puerto Rico reports weak projected liquidity that likely will result in a missed interest payment for the separately rated Puerto Rico Government Development Bank (GDB) on April 1, 2016 or a missed GDB principal payment on May 2, 2016.
The agency expects the July 1, 2016, debt service payment of $224.6 million for HTA and $9.5 million for CCD debt will be paid from the last of trustee-held HTA and CCD bond reserves, and that these issuers will default on the succeeding Jan. 1, 2017, debt service payment date.
Puerto Rico has not been forwarding to the bond trustee money pledged to HTA and CCD debt service payments, and S&P believes a default on HTA and CCD debt is a virtual certainty by Jan. 1 of next year.
The COFINA bond trustee holds sufficient money to make the next upcoming August 2016 COFINA debt service payment from pledged sales tax set-asides in the first half of the fiscal year, but weak projected liquidity and the commonwealth's apparent unwillingness to prioritize debt service over other operating costs, as evidenced by current commonwealth restructuring proposals, lead S&P to conclude that annual segregation of sales taxes pledged to COFINA that are scheduled to begin again on July 1 may not occur. The commonwealth's current proposal for COFINA debt would impose a greater restructuring haircut on COFINA than on GO debt.
Default could occur earlier than scheduled debt service due dates for all tax-backed debt, S&P said, if the U.S. Congress grants Puerto Rico's request for debt restructuring authority, whether it be an extension to Puerto Rico of Chapter 9 bankruptcy law provisions that currently apply to the states, which would allowed Puerto Rico to file its public corporations into bankruptcy; or a "super Chapter 9" that applies to the Puerto Rico central government; or if other types of special restructuring authority were authorized by Congress, such as one that might require majority consensual approval of bondholders.
It rates all Puerto Rico tax-backed debt at CC, except for Puerto Rico Public Finance Corp. and Puerto Rico Infrastructure Financing Authority federal rum excise tax-secured debt, which is currently in default and rated D, reflecting Puerto Rico's projection of limited liquidity available to make payment for all its debt through the remainder of the fiscal year, the likelihood of another operating deficit in the current fiscal year that could further pressure liquidity, and the commonwealth's proposal for all bondholders to take significant restructuring haircuts.
The negative outlook reflects its view that default is a virtual certainty. If any specific debt issues fell into default, it would lower the rating on the debt to D. Although it does not expect it to occur, if liquidity improved to the extent S&P believes it likely the commonwealth would avoid near-term default, it could potentially raise the rating back to the CCC category.
