OREANDA-NEWS. Fitch Downgrades Puerto Rico's IDR and Related Ratings to 'C'; Maintains Rating Watch Negative Fitch Ratings has downgraded the Commonwealth of Puerto Rico's Issuer Default Rating (IDR) and related debt ratings to 'C' from 'CC'. Fitch maintains the ratings on Rating Watch Negative. A complete list of affected credits is included at the end of this release.

RESTRUCTURING, DEFERRAL OR DEFAULT APPEARS INEVITABLE: The 'C' rating indicates Fitch's belief that default of some kind is inevitable. The breakdown of negotiations between the government and major bondholders, the recent ruling by the Supreme Court on the commonwealth's bankruptcy legislation, and the slow process of federal legislation in support of the Commonwealth indicate that a debt restructuring, deferral, or default has become inevitable. Recently released proposals and counterproposals between the commonwealth and bondholders indicate a distressed debt exchange of some kind is inevitable. Moreover, with sizeable debt service payments due on July 1, 2016, the probability of default on the general obligation debt is high.

NO LEGAL PATH TO DEBT RESTRUCTURING: The commonwealth continues to seek federal assistance and a path toward restructuring its obligations. It has not been successful in its attempt to create a legal construct for bankruptcy. The U. S. Supreme Court ruled on June 13, 2016, that the 2014 Puerto Rico Public Corporation Debt Enforcement and Recovery Act conflicted with federal bankruptcy law and let stand an appeals court ruling invalidating the law. This leaves federal legislation and negotiation with creditors as remaining options for Puerto Rico to restructure its debt and avoid a disorderly default.

FEDERAL LEGISLATION ADVANCING: A bill establishing an oversight board has been passed by the U. S. House of Representatives (the Puerto Rico Oversight, Management and Economic Stability Act or PROMESA) and has moved to the Senate for consideration. The timing of consideration of the bill in the Senate is unknown leaving the commonwealth without a legal framework for default or restructuring. Fitch will continue to monitor developments at the federal level and evaluate any enacted legislation for its impact on prospects for bondholders.

BREAK DOWN OF NEGOTIATIONS: Following passage of PROMESA by the House, private negotiations broke down between the commonwealth and creditors, as ultimately PROMESA would place authority for continued negotiations within the purview of the oversight board. The ending of negotiations and the filing of lawsuits challenging the commonwealth's debt moratorium and fiscal emergency legislation passed in April 2016 make it more likely that an agreement to avoid default will not be reached prior to July 1.

PREPA MODEL POSSIBLE OPTION: There remains the possibility that bondholders and/or bond insurers will provide liquidity to the commonwealth, similar to that provided to Puerto Rico Electric Power Authority, to continue negotiations and avoid a disorderly default in the absence of a legal framework, on July 1.

RATING SENSITIVITIES

NONPAYMENT OR DISTRESSED DEBT EXCHANGE: Failure to meet debt service obligations as scheduled or execution of a distressed debt exchange, where creditors are offered securities with diminished structural or economic terms as compared to existing bonds to avoid a probable payment default would result in a downgrade of the related issuer's IDR to 'RD' and any affected securities to 'D'. Securities that continue to perform will have ratings maintained at 'C'.

For more information on Fitch's treatment of distressed debt exchange, see Fitch's publication titled 'Distressed Debt Exchange' dated June 8, 2016.

SECURITY

GO & GUARANTEED BONDS are secured by the good faith, credit and taxing power of the commonwealth of Puerto Rico. Strong legal provisions for general obligation (GO) debt include a constitutional first claim on commonwealth revenues, including transportation-related and rum excise tax revenues that are dedicated to specific authorities and other bonds.

COFINA BONDS have a security interest in and are payable from commonwealth sales and use tax revenues. COFINA is an independent governmental instrumentality of the commonwealth and affiliate of the GDB established by specific legislation.

ERS BONDS are a limited, non-recourse obligation of the pension system, payable from and secured by a pledge of statutorily required employer contributions to the system.

PRASA 'CC' UNCHANGED

Today's action does not affect Fitch's ratings on debt of the Puerto Rico Aqueduct and Sewer Authority (PRASA), rated 'CC' on Rating Watch Negative. Default, nonetheless, remains probable. The $658 million PRASA commonwealth guaranty revenue bonds will be maintained at the higher PRASA rating of 'CC', Rating Watch Negative.

COMPLETE LIST OF AFFECTED CREDITS

As part of today's action, Fitch has downgraded to 'C' from 'CC' and maintained on Rating Watch Negative all of the following ratings:

--$13 billion Commonwealth of Puerto Rico GO bonds;

--$6.7 billion Puerto Rico Sales Tax Financing Corporation (COFINA) senior lien sales tax revenue bonds and $8.5 billion COFINA first subordinate lien sales tax revenue bonds;

--$2.9 billion Employees Retirement System of the Commonwealth of Puerto Rico (ERS) pension funding bonds;

--$1.4 billion Puerto Rico Public Buildings Authority (PBA) government facilities revenue bonds guaranteed by the Commonwealth.

Fitch does not rate any other appropriation or special tax-secured debt of the commonwealth.