Standard & Poor's Ratings Services said its ratings on $47.5 billion of tax-backed Puerto Rico (CC/Negative) debt are unchanged following release of an Obama administration proposal yesterday by U.S. Treasury Secretary Jacob Lew, Health and Human Services Secretary Sylvia Mathews, and National Economic Council Director Jeffrey Zients, to allow Puerto Rico to seek relief under the U.S. Bankruptcy Code in order to restructure its general obligation and other debt.
The proposal would also provide additional federal Medicaid support to Puerto Rico, establish an earned income tax credit for the commonwealth, and create a federal independent Puerto Rico oversight board.
The CC rating with a negative outlook reflects the view that a default is highly likely, with or without the enactment of this proposal. If Puerto Rico gained the ability to seek protection under the U.S. Bankruptcy Code in order to restructure its debt, it would quickly do so, based on the current Puerto Rico administration's stated intention to pursue restructuring of all its tax-backed debt, even without Bankruptcy Code protection. Enactment of the proposal is highly uncertain, particularly if it involves significant increased federal outlay for Medicaid.
Even if the proposal is enacted, potential delays in enactment would negate timely relief of more immediate short-term cash flow difficulties, although the proposal may provide financial help in the long term, S&P said.
Puerto Rico projects large increases in future years' health care system deficits, which increased Medicaid funding at levels consistent with that of U.S. states might address. Likewise, an earned income tax credit could provide an incremental boost to future economic activity, but one not likely to be significant in the near term.
