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Rating Action:

Moody's downgrades Puerto Rico GDB notes to Ca from Caa1, GOs to Caa2 from Caa1; outlook negative

Global Credit Research - 21 May 2015

Approximately $54.8B of debt affected

New York, May 21, 2015 -- Moody's Investors Service has downgraded the Government Development Bank for Puerto Rico's notes to Ca from Caa1, the Commonwealth of Puerto Rico's general obligation and guaranteed bonds to Caa2 from Caa1, and other affiliated credits by two notches in most cases. In all, about $54.8 billion was affected by these actions, and a list of rating changes is at the end of this report. Included in the total debt affected are $15.2 billion of Sales Tax Financing Corporation (or COFINA) bonds. COFINA's senior debt was downgraded to Caa2 from B3, and its subordinate-lien obligations were lowered to Caa3 from Caa1. The outlook for all affected securities remains negative.

SUMMARY RATING RATIONALE

According to recent disclosures, cash resources at the GDB may be fully depleted by the end of August in the absence of market access or emergency actions to preserve cash. GDB faces a 53% debt-service surge in the fiscal year starting July 1, and deposit withdrawals by the Puerto Rico Electric Power Authority (Caa3 negative) and the Puerto Rico Housing Administration in coming weeks will accelerate GDB's liquidity erosion. We believe that the commonwealth will not be able to complete its planned financing (which was to replenish cash at the GDB) before the end of the fiscal year, and that Puerto Rico and the GDB will be forced to pursue cash-conservation measures such as seeking to defer principal repayment to holders of bonds that are not protected by the strongest revenue pledges or constitutional provisions, such as GDB notes and the government's subject-to-appropriation debt. As a consequence, ratings on Puerto Rico's unprotected securities have dropped to levels consistent with substantial expected losses. The legally protected securities - notably, the government's general obligation and Sales Tax Financing Corp. (COFINA) bonds - are also affected by rising default risk, given that they account for a significant majority of the commonwealth's tax-supported debt burden. The higher ratings assigned to the GO and COFINA credits incorporate their legal protections and the government's incentive to avoid litigation with bondholders.

OUTLOOK

The outlook for Puerto Rico and its related debt remains negative, because of trends such as weakening liquidity and economic deterioration, which we believe may further heighten default probabilities and further reduce bondholder recovery prospects in coming months.

WHAT COULD MAKE THE RATING GO UP

• Restoration of sufficient liquidity position to prevent defaults

• Enactment of sustainable fiscal plan that moves toward structural balance while meeting financial obligations

WHAT COULD MAKE THE RATING GO DOWN

• For legally protected securities (primarily GO and COFINA), indications of growing default risk

• Rising loss-given-default expectations on lower-rated securities

OBLIGOR PROFILE

Puerto Rico is a territory of the United States, with a population of 3.5 million (and an estimated population decline of 1.4% in 2014). The island has a high unemployment rate of 11.8%, high debt and pension metrics, and a declining economy.

LEGAL SECURITY

This action affects many of the commonwealth's securities, including the GO debt, which is a full faith and credit obligation of the commonwealth.

USE OF PROCEEDS

Not applicable

RATINGS AFFECTED

Downgraded to Caa2:

COFINA Senior (from B3)

Puerto Rico Industrial Development Company (from B3)

Commonwealth general obligation and guaranteed (from Caa1)

Aqueduct and Sewer Authority (from Caa1)

Downgraded to Caa3:

Municipal Finance Agency (from Caa1)

University of Puerto Rico -- System Revenue Bonds (from Caa2)

Downgraded to Ca:

University of Puerto Rico -- Educational Facilities Revenue Bonds (from Caa3)

Commonwealth's appropriation-backed debt (from Caa2)

Government Development Bank debt (from Caa1)

Highways and Transportation Authority (from Caa2)

Infrastructure Financing Authority -- rum tax bonds (from Caa2)

Pension Funding Bonds (from Caa2)

Convention Center District Authority (from Caa2)

RATING METHODOLOGIES

The principal methodology used in rating the Commonwealth of Puerto Rico, Puerto Rico Municipal Finance Agency, Puerto Rico Highway & Transportation Authority, Puerto Rico Aqueduct and Sewer Authority, Puerto Rico Infrastructure Financing Authority, Government Development Bank for Puerto Rico, Convention Center District Authority, and Puerto Rico Public Finance Corporation debt was US States Rating Methodology published in April 2013.

The additional methodology used in rating the Puerto Rico Highway & Transportation Authority debt, the Puerto Rico Infrastructure Financing Authority debt, and the Puerto Rico Convention Center District Authority debt was US Public Finance Special Tax Methodology published in January 2014.

The additional methodology used in rating the Puerto Rico Aqueduct and Sewer Authority was US Municipal Utility Revenue Debt published in December 2014.

The additional methodology used in rating the Puerto Rico Public Finance Corporation debt was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011.

The principal methodology used in rating the University of Puerto Rico debt was U.S. Not-for-Profit Private and Public Higher Education published in August 2011.

The principal methodology used in rating the Puerto Rico Sales Tax Financing Corporation debt and the Puerto Rico Industrial Development Company debt was US Public Finance Special Tax Methodology published in January 2014. An additional methodology used in this rating was US States Rating Methodology published in April 2013. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Edward Hampton
VP - Senior Credit Officer
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Nicholas E Samuels
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Puerto Rico GDB notes to Ca from Caa1, GOs to Caa2 from Caa1; outlook negative
No Related Data.
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