PUERTO RICO HAS OVER $41 BILLION OUTSTANDING IN NET TAX-SUPPORTED DEBT
Puerto Rico (Commonwealth of)
2011 Series A Bonds (Commownealth Appropriation Bonds)
Expected Sale Date
NEW YORK, Jul 12, 2011 -- Moody's Investors Service has assigned a rating of Baa1 to the upcoming sale of
approximately $240 million Puerto Rico Public Finance Corporation 2011 Series A
Bonds (Commonwealth Appropriation Bonds). The bonds will price the week of July
11, 2011, and will be sold in the U.S. tax-exempt market. The bonds
will refinance certain maturities of the 2004 Series A Bonds, which have a
mandatory tender date of February 1, 2012. The 2011 Series A bonds will be fixed
rate and consist of one term bond due on August 1, 2028. There will be one
sinking payment in August, 2027. Semi-annual debt service dates (February 1 and
August 1) will be interest only.
Puerto Rico's general obligation rating is on Watchlist for possible downgrade,
reflecting the weak funding of its pension plans and the significant strain that
future pension funding requirements will likely exert on the commonwealth's
financial position. We expect to conclude our review before the end of August.
During this timeframe, we will assess the governor's recently announced
proposals for addressing the retirement system's underfunding, how far the
proposals get toward relieving the commonwealth of the long-term budgetary
pressure that has built up as a result of the historic underfunding of the
system, and the long-term costs of the solutions. In addition, we will assess
the commonwealth's proposed budget to determine whether it moves the
commonwealth closer to structural balance, and whether we believe the revenue
and expense forecasts used are reasonable.
The Baa1 rating is notched off the commonwealth's general obligation
rating (Puerto Rico general obligations rated A3 on review for downgrade)
and reflects the fact that the payment of debt service is subject to
For more information on the commonwealth, please see our report published on
June 24, 2011.
* Strong management dedication to tax and fiscal reform, including reducing the
* Politically and economically linked to the U.S., with benefit of the nation's
strong financial, legal, and regulatory systems
* Large economy, with gross product exceeding those of 10 states and population
exceeding those of 24 states
* Broad legal powers to raise revenues, adjust spending programs, and employ
borrowing in order to maintain fiscal solvency
* Very low pension funded ratios relative to U.S. states
* Very high government debt level relative to the economy, due in part to
financing budget deficits.
* High unemployment, low workforce participation, and high poverty levels
compared to the U.S.; average income levels remain below 50% relative to the
U.S. mainland median
* Large size of commonwealth government relative to the economy (although recent
government actions are reducing the size of the government employment sector)
* Multi-year trend of large General Fund operating deficits, financed by deficit
* Local economy that has been in recession since 2006
DETAILED CREDIT DISCUSSION
PFC SECURITY STRUCTURE
As provided by the constitution, if a budget for a given fiscal year is not
adopted by July 1, the budget for the preceding fiscal year is automatically
renewed until a new budget is approved. In the event that a timely budget is not
adopted, the Puerto Rico Government Development Bank (GDB) has provided an
irrevocable letter of credit for the benefit of PFC bondholders to cover the
maximum debt service increase between any two consecutive fiscal years. This
reduces the risk that a late budget could impact the August 1 debt service due
The rating is on Watchlist for possible downgrade, reflecting the reflecting the
weak funding of the pension plans and the significant strain that future pension
funding requirements will likely exert on the Commonwealth's financial position.
What could move the rating--DOWN
--Continued deterioration in the pension plans' funded ratio.
--Pension reform plans that severely stress the commonwealth's General Fund
--Growth in structural budget gap and an increase in GAAP deficits beyond that
which is expected in the near term.
--Prolonged recession, resulting in declining revenues and deficit financing in
excess of currently projected amounts.
--Lack of market access.
--Material increase in debt.
The principal methodology used in this rating was The Fundamentals of Credit
Analysis for Lease-Backed Municipal Obligations published in October 2004.
Please see the Credit Policy page on www.moodys.com for a copy of this
For ratings issued on a program, series or category/class of debt, this
announcement provides relevant regulatory disclosures in relation to each rating
of a subsequently issued bond or note of the same series or category/class of
debt or pursuant to a program for which the ratings are derived exclusively from
existing ratings in accordance with Moody's rating practices. For ratings issued
on a support provider, this announcement provides relevant regulatory
disclosures in relation to the rating action on the support provider and in
relation to each particular rating action for securities that derive their
credit ratings from the support provider's credit rating. For provisional
ratings, this announcement provides relevant regulatory disclosures in
relation to the provisional rating assigned, and in relation to a
definitive rating that may be assigned subsequent to the final issuance of the
debt, in each case where the transaction structure and terms have not
changed prior to the assignment of the definitive rating in a manner that
would have affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
Information sources used to prepare the rating are the following: parties
involved in the ratings, and public information.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing a rating.
Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.
Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.
Public Finance Group
Moody's Investors Service
Baye B. Larsen
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S ASSIGNS Baa1 RATING, ON WATCHLIST FOR POSSIBLE DOWNGRADE, TO APPROXIMATELY $240 MILLION PUERTO RICO PUBLIC FINANCE CORPORATION APPROPRIATION BONDS
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