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Rating Action:

Moody's downgrades Puerto Rico GOs and COFINA Sr Bonds to Caa3 from Caa2; outlook negative

Global Credit Research - 01 Jul 2015

Other Caa ratings lowered one notch, Ca ratings affirmed; about $56B of debt affected

New York, July 01, 2015 -- Moody's Investors Service has downgraded the Commonwealth of Puerto Rico's general obligation (GO) and guaranteed bonds as well as its senior lien Sales Tax Financing Corporation (Sr COFINA) bonds to Caa3 from Caa2. We also lowered ratings assigned to other securities, including bonds of the Puerto Rico Aqueduct and Sewer Authority, which also were downgraded to Caa3 from Caa2. Bonds already in the Ca category were affirmed at that level. In all, about $55.5 billion was affected by these actions. With today's GO rating action, the seventh downgrade in the past five years, the commonwealth's rating has declined 12 notches since 2011. The outlook for all affected securities remains negative.

SUMMARY RATING RATIONALE

Governor Alejandro García Padilla's declaration that the commonwealth cannot pay its debt, the suspension of a law requiring monthly general obligation debt service deposits and the decision to devise broad restructuring plans are clear signs that holders of even those Puerto Rico securities with strong legal protections face significant loss. While our ratings still indicate higher recovery rates for the GO and senior COFINA bonds than for other Puerto Rico government and public corporation securities, it appears unlikely that a limited restructuring excluding those better-protected bonds will be sufficient for Puerto Rico to gain the relief desired. This is consistent with the fact that the GO and COFINA bonds account for a very large share of Puerto Rico's debt.

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 point to recovery prospects at the low end of estimates. Efforts to right-size a debt burden that has become overwhelming, following years of deficit financing and economic stagnation, probably will trigger a long and litigious process, perhaps heightening bondholder loss prospects. We will adjust ratings as needed to the extent that recovery rates appear to diverge from those implied by our ratings.

WHAT COULD MAKE THE RATING GO UP

• Restoration of sufficient liquidity position and fiscal operations sufficiently improved to prevent default

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

WHAT COULD MAKE THE RATING GO DOWN

• Unilateral actions by the commonwealth that point to decreased bondholder recoveries

• Negotiated restructuring efforts that, although agreed to, result in reduced recoveries

• Protracted legal confrontations during which payment of debt service is suspended

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

PRINCIPAL METHODOLOGY

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.

The following information supplements Disclosure 10 ("Information Relating to Conflicts of Interest as required by Paragraph (a)(1)(ii)(J) of SEC Rule 17g-7") in the regulatory disclosures made at the ratings tab on the issuer/entity page on www.moodys.com for each credit rating as indicated:

Moody's also was paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine the following credit ratings: All credit ratings for all Sales included in this action assigned to Government Development Bank of Puerto Rico.

Moody's was not paid for services other than determining a credit rating in the most recently ended fiscal year by the person that paid Moody's to determine the following credit ratings: All credit ratings for all Sales included in this action assigned to the Commonwealth of Puerto Rico, Puerto Rico Municipal Finance Agency, Puerto Rico Aqueduct & Sewer Authority, Puerto Rico Convention Center District Authority, Puerto Rico Employees Retirement System, Puerto Rico Highway & Transportation Authority, Puerto Rico Industrial Development Company, Puerto Rico Sales Tax Financing Corp. and University of Puerto Rico.

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

Emily Raimes
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 GOs and COFINA Sr Bonds to Caa3 from Caa2; outlook negative
No Related Data.
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