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01 Jul 2016
New York, July 01, 2016 -- Summary Rating Rationale
Moody's Investors Service has revised the outlook on the Commonwealth of Puerto Rico, as well as seven affiliated obligors, to developing from negative, while affirming the ratings of those entities, based on the US government's June 30 enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). The rating action did not involve the Puerto Rico Electric Power Authority (PREPA), rated Caa3 with a negative outlook.
The law will reduce the risk of protracted litigation, which would be the most likely outcome in the absence of a clear legal framework in which to restructure Puerto Rico's debt. While offsetting this risk appears positive for overall recovery prospects, the oversight board created by PROMESA will have wide authority in shaping how an eventual debt restructuring plays out. The board could seek to address pension benefits, and it could try to adhere strictly to legal supports for certain debt types, widening their recovery premium over other bonds. While the creation of the board clearly may cause changes to bondholder recovery prospects, it is premature to estimate what those changes will be.
The "developing" outlook signals that although the removal of legal uncertainties may prevent Puerto Rico's credit from further deterioration, the risks of default and loss remain elevated. Federal intervention may improve aggregate investor recoveries by providing for an efficient resolution of Puerto Rico's crisis and taking steps to halt the decline of its economic base. Implications for specific bondholder types will become more clear as the oversight board is constituted and takes its first actions.
Factors that Could Lead to an Upgrade
Restoration of liquidity position and fiscal performance sufficient to prevent additional defaults
Reductions in Puerto Rico's pension funding burden as part of the debt restructuring process
Indications that, because of the actions of a court or other authority, bondholder recoveries will be greater than currently anticipated
Any federal government assistance that improves bondholder recovery prospects
Factors that Could Lead to a Downgrade
Unilateral actions by the control board or a judicial authority 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
Various, including the commonwealth's general obligation (GO) pledge, and pledges of specific tax revenues.
Use of Proceeds
Puerto Rico is a self-governing territory of the United States. It operates under a constitution approved in 1952. The island's population, now 3.47 million, has been declining as Puerto Ricans in increasing numbers have moved to the mainland US in search of work. The nature of Puerto Rico's relationship with the US - whether to retain its current status as a commonwealth or to become a state - is a central political issue on the island. The two dominant Puerto Rican political parties are defined by their views on statehood: the Partido Nuevo Progresista (PNP) advocates statehood, while the Partido Popular Democratico is in favor of continued commonwealth status. A smaller, third party favors independence. Our rating does not contemplate a change in the island's relationship to the US.
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, Government Development Bank for Puerto Rico, Puerto Rico Industrial Development Company, and Puerto Rico Public Sales Tax Financing Corp. debt was US States Rating Methodology published in April 2013. An additional methodology used in rating the Commonwealth of Puerto Rico was The Fundamentals of Credit Analysis for Lease-Backed Municipal Obligations published in December 2011. The principal methodology used in the University of Puerto Rico rating was Global Higher Education published in November 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.
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 credit rating action on the support provider and in relation to each particular credit 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.
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Moody's revises Puerto Rico's outlook to Developing from Negative
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