Downgrades of Electric Power Authority (PREPA) and other Puerto Rico entities affect over $61 billion total
New York, July 01, 2014 -- Moody's Investors Service has downgraded the Commonwealth of Puerto
Rico to B2 from Ba2, affecting $14.4 billion of outstanding
general obligation (GO) bonds. Concurrently, commonwealth
agencies and public corporations have been downgraded, 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 respectively
were lowered to Ba3 and B1. The Puerto Rico Electric Power Authority
(PREPA) was downgraded to Caa2 from Ba3, while the Puerto Rico Aqueduct
and Sewer Authority (PRASA) was downgraded to Caa1 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). For PREPA,
PRHTA and PRASA, the newly lowered ratings remain under review for
possible further downgrade. 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. The outlook for
the GDB as well as for commonwealth GO and related debt remains negative.
All the rating and outlook changes incorporated in this action are listed
at the end of this release.
SUMMARY RATING RATIONALE
The downgrades of Puerto Rico and its debt-issuing entities follow
the commonwealth's enactment of a law (the Puerto Rico Public Corporation
Debt Enforcement and Recovery Act) that will allow public corporations
to defer or reduce payments on outstanding bonds. By providing
for defaults by certain issuers that the central government has long supported,
Puerto Rico's new law 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. Application
of the law may further limit the commonwealth's market access,
leaving it more vulnerable to financial risk and unable to fund capital
projects.
The COFINA ratings have now been positioned closer to the GO, reflecting
their increased susceptibility to any action that impairs bondholders'
claims on sales tax revenues if the commonwealth invokes its police powers
and acts to protect the health and safety of the general public ahead
of bondholders. The new GO and COFINA bond ratings face heightened
risk of default, given the commonwealth's stagnant economic
conditions and disproportionately large debt burden.
Ratings now assigned to PREPA, PRASA and PRHTA and the Puerto Rico
Convention Center District Authority are under review for further downgrade,
reflect the escalating risk that these entities could default voluntarily
under the new restructuring law. We have also lowered ratings on
certain bonds previously considered as equivalent to the general obligation
rating, or "capped" at the GO rating, because
of their increased risk of default and potentially lower recovery rates
than the GO. The ratings on Puerto Rico's pension funding
bonds, as well as debt issued by the GDB and the Municipal Finance
Agency, and the Puerto Rico Infrastructure Financing Authority (PRIFA,
bonds secured by rum tax remittances from the federal government) were
downgraded to B3 from Ba2 and are now rated one notch below the GO bonds
due to our view that the expected loss rates on these securities are now
higher. GDB has direct exposure to the risks implicit in the restructuring
law, given its substantial loans to PRHTA and other public corporations.
SUMMARY OF DEBT AFFECTED BY LEGISLATION
Downgraded to Ba3 from Baa1; outlook negative
--COFINA Senior
-- Industrial Development (PRIDCO)
Downgraded to B1 from Baa2; outlook negative
--COFINA Subordinate
Downgraded to B2 from Ba2; outlook negative
--General Obligation
Downgraded to B3 from Ba2; outlook negative
--GDB notes
--Infrastructure Financing Authority (PRIFA)
--Municipal Finance Agency
--Pension funding bonds
Downgraded to B3 from Ba3; outlook negative
--Appropriation debt of commonwealth
Downgraded to Caa1 from Ba3; ratings under review
-- Aqueduct & Sewer Authority(PRASA)
-- Highway & Transportation (PRHTA)
Downgraded to Caa1 from Ba2; outlook under review
Convention Ctr (Hotel Occupancy Tax)
Downgraded to Caa2 from Ba3; ratings under review
-- Electric Power Authority (PREPA)
Downgraded to Caa2 from B1; ratings under review
-- PRHTA Subordinate-lien
Downgraded to Caa1 from Ba3; outlook negative
--University of Puerto Rico (System)
Downgraded to Caa2 from B1; outlook negative
--University of Puerto Rico (Facilities)
RATING METHODOLOGIES
The principal methodology used in rating the Commonwealth of Puerto Rico,
Puerto Rico Municipal Finance Agency, Puerto Rico Public Buildings
Authority, Puerto Rico Highway & Transportation Authority,
Puerto Rico Aqueduct and Sewer Authority, Puerto Rico Infrastructure
Financing Authority, Government Development Bank for Puerto Rico,
Puerto Rico Public Finance Corporation, Puerto Rico Convention Center
District Authority and Puerto Rico Employees Retirement System 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 debt was Analytical Framework For Water And Sewer System
Ratings published in August 1999.
The additional methodology used in rating the Government Development Bank
for Puerto Rico debt was Rating Transactions Based on the Credit Substitution
Approach: Letter of Credit backed, Insured and Guaranteed
Debts published in March 2013.
The additional methodology used in rating the appropriation debt was The
Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations
published in December 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.
The principal methodology used in rating the Puerto Rico Electric Power
Authority debt was U.S. Public Power Electric Utilities
with Generation Ownership Exposure published in November 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 additional methodology
used in rating the lease debt was The Fundamentals of Credit Analysis
for Lease-Backed Municipal Obligations published in December 2011.
Please see the Credit Policy page on www.moodys.com for
a copy of these methodologies.
REGULATORY DISCLOSURES
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
Vice President - Senior Analyst
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
Diane Viacava
VP - Senior Credit Officer
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Richard Donner
VP - Senior Credit Officer
Public Finance Group
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
Angelo J Sabatelle
Associate Managing Director
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 to B2 from Ba2, COFINA Senior-Sub to Ba3-B1; outlooks negative