Moody's Investors Service said it has assigned a rating of (P) Ba2, with a negative outlook, to the commonwealth of Puerto Rico's planned issuance of up to $3.5 billion 2014 A general obligation bonds.
The bonds, which are scheduled to price in the next few weeks, would provide liquidity to repay internal loans from the Government Development Bank for Puerto Rico (GDB), the commonwealth's fiscal agent, as well as to refund the commonwealth's general obligation variable rate bonds and terminate related swaps.
The Ba2 rating is provisional because documents are not finalized, and the authorizing legislation for the current issue allows these bonds to include atypical terms and conditions. Moody's expects the transaction's conditions to provide for New York legal jurisdiction in the event of litigation related to the bonds, but the full extent of any investor-requested terms remains unknown.
It will finalize the rating following an evaluation of actual bond terms, conditions and amount of proceeds. A material change in terms or amounts could also result in a change in ratings on the commonwealth's outstanding debt.
Supporting the Ba2 rating is the fact that the current administration has taken notable steps to rein in debt and spending, to reform the retirement systems, and to promote economic growth. The Ba2 rating also reflects the belief that the commonwealth will raise enough cash in the upcoming financing to enable it to maintain an adequate liquidity profile through the end of 2015.
Failure to raise sufficient funds in this transaction for Puerto Rico's pressing liquidity needs would have severe implications for the commonwealth's credit profile, and could result in a multi-notch downgrade.
The Ba2 rating negative outlook is also based on chronic deficit financing, pension underfunding, and budgetary imbalance, along with seven years of economic recession and uncertain prospects for future economic growth. These factors, over a long period, have driven up Puerto Rico's debt and fixed costs, narrowed its liquidity, and hampered its bond-market access. Puerto Rico faces years of difficult decisions, as its debt and pension costs climb.
