Fitch Maintains Rating Watch Negative on Puerto Rico Debt
--Commonwealth of Puerto Rico GO bonds;
--Puerto Rico Electric Power Authority (PREPA) power revenue bonds;
--Puerto Rico Aqueduct and Sewer Authority (PRASA) senior lien revenue bonds;
--Puerto Rico Sales Tax Financing Corporation (COFINA) senior lien sales tax revenue bonds and first subordinate lien sales tax revenue bonds;
--Employees Retirement System of the Commonwealth of Puerto Rico (ERS) pension funding bonds;
--Puerto Rico Public Buildings Authority (PBA) government facilities revenue bonds guaranteed by the Commonwealth and rated by Fitch;
--PRASA Commonwealth guaranty revenue bonds.
The 'CC' rating indicates Fitch's belief that default of some kind appears probable, with the Rating Watch reflecting the commonwealth's stated intent to restructure its debt in the near term.
The commonwealth continues to seek federal assistance, and numerous proposals are active in the U.S. Congress. These proposals include granting of bankruptcy authorization, financial and bonding support, and increased federal oversight. Fitch will continue to monitor developments at the federal level and evaluate any enacted legislation for its impact on prospects for bondholders.
The recent decision by the U.S. Supreme Court to take up the appeal of lower court rejections of the 2014 restructuring law introduces additional uncertainty, particularly for negotiations with PREPA creditors.
KEY RATING DRIVERS
TAX-SUPPORTED DEBT: The commonwealth's tax-supported bonds (GO & guaranteed, COFINA, and ERS) have been downgraded to the current level as a result of willingness to pay concerns and liquidity challenges. The most recent downgrade on June 29, 2015 was precipitated by public comments made by the governor supporting broad debt restructuring, a strategy the commonwealth has begun to pursue since that time. Although the commonwealth made the decision to make the full debt service payment on GO guaranteed debt on
Dec. 1, it did so while at the same time ordering that revenues budgeted to pay debt service on debt of certain public corporations and instrumentalities (none rated by Fitch) may be redirected. Fitch believes that the political environment and liquidity pressures leave all of the commonwealth's debt vulnerable to default until restructuring plans become clearer.
PREPA: On Sept. 2, 2015, the Authority announced that it had reached a restructuring agreement in principle with certain bondholders holding approximately 35% of the aggregate principal amount of bonds outstanding. The proposal would preclude full and timely payment of the power revenue bonds according to the original terms, if approved by the required holders and executed. Although existing agreements with certain creditors may allow the scheduled debt service payment to be made on Jan. 1, 2016, Fitch remains concerned that PREPA's net cash receipts and existing funds on hand are insufficient to meet longer term working capital, debt service and other funding requirements.
PRASA: PRASA's rating is driven by and currently capped at the commonwealth's GO rating given the commonwealth's ability to affect PRASA's operations materially both directly and indirectly. Commonwealth officials have indicated that PRASA may not be part of a larger restructuring of commonwealth debt, citing the fact that the authority's operations are currently self-sufficient. However, Fitch does not believe it is appropriate to distinguish ratings on the commonwealth's debt without greater clarity on the form any restructuring will take. The authority announced plans to come to market with a \\$750 million transaction in August 2015 but was not successful in selling those bonds. Cash flows have been severely and negatively affected by delays in the financing.
RATING SENSITIVITIES
COMMONWEALTH DECISIONS: Future rating action will likely be linked to commonwealth decisions. As issuer-specific plans become clearer, downgrades to 'C' would be triggered at the point that default appears inevitable. The commonwealth has declared its debt unpayable in aggregate without distinction among its numerous securities. Therefore, at this stage Fitch does not believe that there is sufficient information available to consider default of any of the specific credits that Fitch rates to be inevitable.
Any negotiated resolution would be evaluated for its effect on bondholders. Any restructuring that does not result in full and timely payment of bonds according to the original terms promised, would likely result in a further downgrade to 'C' upon agreement by the required holders and 'D' upon execution.
Fitch's public finance ratings do not address the loss given default of the rated liability, focusing instead on the vulnerability to default of the rated liability.
CREDIT PROFILE
The commonwealth has a complex debt structure including GO, sales tax, guaranteed, and public corporation debt. The \\$70 billion reported figure for Puerto Rico's public debt includes not only debt supported by commonwealth tax revenues and legislative appropriations but also debt of PREPA and PRASA and other revenue-supported debt that is not the obligation of the central government. GO and GO-guaranteed bonds equal 26% of total public sector debt as reported by the commonwealth and sales tax-backed COFINA debt another 22%. PREPA, with \\$9 billion of reported debt outstanding, equals another 13% and PRASA only about 5%.
SECURITY
GO & GUARANTEED BONDS are secured by the good faith, credit and taxing power of the commonwealth of Puerto Rico. Strong legal provisions for 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.
PREPA BONDS are secured by a senior lien on net revenues of the electric system.
PRASA BONDS are secured by a gross lien of all authority revenues related to PRASA's combined water and sewer system. In addition, certain revenue refunding bonds and loans granted to address certain regulatory violations are backed by a commonwealth guarantee.
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.
For additional information on Fitch's analysis of the commonwealth credits please see the following releases:
--'Fitch Rates Puerto Rico Aqueduct & Sewer Authority's 2015A Sr. Revs 'CC'; Maintains Negative Watch' dated Aug. 17, 2015;
--'Fitch Downgrades Puerto Rico's GO and Related Ratings to 'CC'; Maintains Rating Watch Negative' dated June 29, 2015;
--'Fitch Maintains Puerto Rico Electric Power Auth's Rev Bonds on Negative Watch' dated Dec. 11, 2014.
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