Standard & Poor's Ratings Services said it has lowered its CCC-minus rating on Puerto Rico Public Finance Corp. (PFC) series 2011A and B and series 2012 A bonds to CC following non-appropriation of debt service by the legislature in the fiscal 2016 budget.
S&P said it sees default for this debt on its next debt service date, Aug. 1, 2015, as a virtual certainty.
The rating outlook is negative.
At the same time it placed all other Puerto Rico tax-backed debt, currently rated CCC-minus/negative on CreditWatch with negative implications.
Non-appropriation of PFC debt service represents a departure from Puerto Rico's previous practice of timely funding of debt service and signals deteriorating liquidity, which could call into question the ability to fund debt service payments as early as September.
If liquidity pressures intensify so as to call into question near-term debt payments, S&P would likely lower its rating.
Puerto Rico's administration has called for restructuring discussions with all creditors. A default on the PFC bonds would be further demonstration of increasing unwillingness to pay debt in full and also raises the potential for future unequal treatment between various types of bondholders.
More clarity could come after the presentation to the governor and the legislature of recommendations from a special commission on Sept. 1, which could discuss restructuring options.
The legislature did not appropriate for debt service payments for the PFC bonds in its fiscal 2016 budget (the fiscal year began July 1), despite a request by the Puerto Rico Office of Management and Budget to do so.
It is very unlikely the legislature will appropriate for debt service before an upcoming Aug. 1 debt service payment date, as that would require the governor to call a special session of the legislature.
There are no known plans to call a special session. Default on these bonds would not create a cross-default with other debt, and PFC bondholders would have limited remedies against the commonwealth.
