The U.S. mainland’s three credit ratings agencies showered Puerto Rico with downgrades and warnings of further revisions Friday, upholding a trend that began a day earlier in response to the filing of a bill paving the way for the restructuring of fiscally troubled public agencies.
Standard & Poor’s issued warnings to the Government Development Bank, the University of Puerto Rico, the Puerto Rico Highway and Transportation Authority, as well as the central government’s General Obligation bonds, which represent billions in the market.
S&P placed its ‘BB/B’ long- and short-term issuer credit ratings and ‘BB’ senior unsecured ratings on the GDB on watch with negative implications, given that the agency has about $2 billion in loans to three public corporations that could be restructured.
“The CreditWatch placement follows the proposed bill that is intended to allow some public entities in Puerto Rico to restructure their debt,” said Standard & Poor’s credit analyst Sunsierre Newsome.
“The liquidity and financial condition of GDB significantly depends on the ability of the Commonwealth and its public corporations to repay their debt,” said Newsome. “Despite various measures already taken to improve the finances of the public entities, economic and fiscal problems remain.”
“Given the financial difficulties of Puerto Rico’s public entities and the potential for restructurings to occur, we placed our ratings on GDB on credit watch negative,” she said, adding S&P believes the introduction of the bill is “indicative of the growing economic and fiscal challenges for the Commonwealth as a whole.”
“This could lead to additional liquidity pressures in the long term and a potential shift in Puerto Rico’s historically strong willingness to continue to meet its obligations to bondholders,” the analyst said. “We anticipate economic challenges to persist in Puerto Rico over the next two years, with very high unemployment and budget deficits in fiscal 2014, and the potential for general fund operating deficits in fiscal 2015, although the administration has announced an intention to introduce a balanced budget for fiscal 2015.”
The rating on GDB is one notch lower than the rating on the Commonwealth. The agency also placed the island’s GO bonds on watch with negative implications. Standard & Poor’s has also placed its debt ratings on the Puerto Rico Employee Retirement System, the Puerto Rico Infrastructure Financing Authority, the Puerto Rico Convention Center District Authority, the Puerto Rico Highways and Transportation Authority, and the Puerto Rico Sales Tax Financing Corp, known as COFINA, on CreditWatch with negative implications.
S&P warned that the negative CreditWatch placement indicates it could lower the ratings within the next 60 to 90 days pending an eventual signing of the approved bill into law and its evaluation of the potential impact on the various ratings included in this action.
As for the UPR, S&P placed the ‘BB+’ ratings of existing university system revenue bonds, some of which were issued by the Puerto Rico Industrial, Tourist, Educational, Medical, & Environmental Control Facilities Finance Authority, on CreditWwatch with negative implications.
“Per our government related entities criteria, a rating or outlook change on Puerto Rico [BB+/Watch Neg] would result in a rating or outlook change to the UPR given the high likelihood of extraordinary support,” said S&P credit analyst Bianca Gaytan-Burrell.
Meanwhile, Fitch announces separately that it had downgraded the following AES Puerto Rico (PR) L.P obligations to ‘CC’ due to the downgrade to ‘CC’ of the project’s main customer, the Puerto Rico Electric Power Authority:
- $161.8 million 6.625 percent Cogeneration facility revenue bonds, series A (tax-exempt bonds) due June 1, 2026; and,
- $33.1 million 9.12 percent Cogeneration facility revenue bonds, series B (taxable bonds) due June 1, 2022.
Finally, Moody’s downgraded the Puerto Rico Aqueduct and Sewer Authority and the Highway and Transportation Authority to Ba3, while keeping the ratings under review for possible further downgrade.
The rating on PRASA’s revenue bonds was downgraded to Ba3 from Ba2. PRHTA’s Highway Revenue Bonds (1968 Resolution) were downgraded to Ba3 from Ba1. The Transportation Revenue Bonds (1998 Resolution) were downgraded to Ba3 from Ba2, and the Subordinate Transportation Revenue Bonds were downgraded to B1 from Ba3.
Moody’s echoed the concerns of the other two agencies regarding the proposed legislation’s potential effects on public corporation liabilities.
“The governor’s proposal of a public corporation liability law… signals a rising risk that the commonwealth [GO bonds rated Ba2, negative] is contemplating a strategic restructuring of its public corporation debt,” Moody’s said.
“Public corporations [including PRHTA and PRASA] that could restructure debt under the proposed law should no longer carry credit ratings equal to those of the commonwealth’s general obligation debt,” it further noted. “Moody’s acknowledges that PRHTA and PRASA have taken steps toward self-sufficiency by raising revenues, and that while their internal liquidity is weak, they do not face immediate liquidity needs that would force them to seek near-term debt restructuring.”
However, the downgrades further recognize that both entities have longer-term hurdles, including reduced ability to raise new operating revenues or to impose austerity measures, given the island’s weak economy and their own high debt burdens, the credit ratings agency noted.
Moody’s rational prompted a reaction from PRASA Executive Director Alberto Lázaro, who said the agency has taken steps to maximize efficiencies and gap its deficit.
“We set up a strategic plan to maximize efficiency, reduce water loss, collect overdue accounts, address theft, among others. Furthermore, we have fulfilled our obligations with our creditors,” Lázaro said “We’re confident that we will end the fiscal year without a deficit and we are investing in capital works, generating jobs and economic development.”
He said there are no current circumstances under which PRASA would seek to restructure its debt.