Standard & Poor’s Ratings Services said Wednesday the legislation enacted giving Puerto Rico Gov. Alejandro García-Padilla the power to suspend debt service payments would lead to a further credit downgrade, to “default” status.
At present, the ratings agency maintains ‘CC’ grades on the Commonwealth’s tax-supported debt not already in default, but would lower the rating on debt issued by Puerto Rico Sales Tax Financing Corp. (COFINA), Highways and Transportation Authority (HTA), the Convention Center District Authority (CCD), the Employees Retirement System (ERS), the Puerto Rico Electric Power Authority (PREPA) and the Puerto Rico Aqueduct and Sewer Authority (PRASA) upon “an actual default of principal and interest on a scheduled due date.”
“We could also lower our rating to ‘D’ if the effect of the legislation were to lead to what we would characterize as a distressed debt exchange, or we believe an emergency declaration by the governor to withhold payment on a specific security is equivalent to what we would characterize as a standstill agreement,” S&P said.
The moratorium could potentially include debt secured by Puerto Rico general obligations, COFINA sales taxes, HTA toll revenue and fuel taxes, appropriation-secured debt including that of the ERS debt and Public Building Authority (PBA), CCD hotel taxes, PREPA and PRASA utility system debt, and the Puerto Rico Government Development Bank debt, the ratings agency said.
The next upcoming debt service payment is for $422.8 million on GDB debt (rated CC/Negative) due May 1. The next principal and interest payments on publicly rated tax-supported debt (not currently in default) is scheduled for July 1, 2016, including $777.2 million for GO debt service, $224.6 million for HTA, $91.2 million for the PBA, $13.9 million for the ERS, and $9.5 million for the CCD. The next principal and interest payment on PREPA is for $353 million, also due July 1, 2016.
“We believe the commonwealth’s and PREPA’s weak liquidity will likely lead to a GO and utility default on their July 1 payment date, with or without a debt moratorium. However, we understand that PREPA is continuing to pursue restructuring of its debt obligations as contemplated under a restructuring support agreement that the utility reached with an ad hoc bondholder group,” S&P said.
The governor’s power to declare a debt moratorium under the new legislation expires on Jan. 31, 2017, unless extended for two months, as permitted under the new legislation.