Moody’s Investors Service handed the Commonwealth Puerto Rico a wallop, downgrading it three notches to B2 from Ba2 and impacting $14.4 billion of outstanding general obligation (GO) bonds.
Puerto Rico’s downgrade also affects non-GO bonds
The ratings agency also labeled a negative downgrade on commonwealth agencies and public corporations, 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 was lowered to Ba3 and B1 respectively.
The downgrades are based primarily on what the ratings agency said was a shift from difficult budget tightening and revenue enhancement measures to placing a higher risk of default burden on creditors.
The downgrades follow the Puerto Rico’s enactment of a law that allows public corporations to defer or reduce payments on outstanding bonds. The Puerto Rico Public Corporation Debt Enforcement and Recovery Act allows for defaults by certain issuers that the central government has long supported and “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, in our view, has implications for all of Puerto Rico’s debt, including that of the central government,” the report said.
The defaults included the Puerto Rico Electric Power Authority (PREPA), which was lowered mightily to Caa2 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). The Puerto Rico Aqueduct and Sewer Authority (PRASA) was lowered to Caa1 from Ba3. 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.
Puerto Rico’s may be downgraded further
But the bad news for Puerto Rico didn’t stop there.
For PREPA, PRHTA and PRASA, the newly lowered ratings are still under review and may be downgraded further. Ratings now assigned to PREPA, PRASA and PRHTA and the Puerto Rico Convention Center District Authority are under review for further downgrade, and the ratings “reflect the escalating risk that these entities could default voluntarily under the new restructuring law.”
ValueWalk had previously noted S&P downgraded Puerto Rico’s debt over concerns political and government leaders will be placed in the difficult position of reducing spending and increasing revenues — potentially a precursor for many nations, including the US, that find themselves in fiscal difficulty.