Puerto Rico Cut to Caa2 by Moody's

Moody's Investors Service has downgraded the Government Development Bank for Puerto Rico's notes to Ca from Caa1, the Commonwealth of Puerto Rico's general obligation and guaranteed bonds to Caa2 from Caa1, and other affiliated credits by two notches in most cases. In all, about $54.8 billion was affected by these actions.

Included in the total debt affected are $15.2 billion of Sales Tax Financing Corporation (or COFINA) bonds. COFINA's senior debt was downgraded to Caa2 from B3, and its subordinate-lien obligations were lowered to Caa3 from Caa1. The outlook for all affected securities remains negative.

SUMMARY RATING RATIONALE

According to recent disclosures, cash resources at the GDB may be fully depleted by the end of August in the absence of market access or emergency actions to preserve cash. GDB faces a 53% debt-service surge in the fiscal year starting July 1, and deposit withdrawals by the Puerto Rico Electric Power Authority (Caa3 negative) and the Puerto Rico Housing Administration in coming weeks will accelerate GDB's liquidity erosion. We believe that the commonwealth will not be able to complete its planned financing (which was to replenish cash at the GDB) before the end of the fiscal year, and that Puerto Rico and the GDB will be forced to pursue cash-conservation measures such as seeking to defer principal repayment to holders of bonds that are not protected by the strongest revenue pledges or constitutional provisions, such as GDB notes and the government's subject-to-appropriation debt. As a consequence, ratings on Puerto Rico's unprotected securities have dropped to levels consistent with substantial expected losses.

The legally protected securities - notably, the government's general obligation and Sales Tax Financing Corp. (COFINA) bonds - are also affected by rising default risk, given that they account for a significant majority of the commonwealth's tax-supported debt burden. The higher ratings assigned to the GO and COFINA credits incorporate their legal protections and the government's incentive to avoid litigation with bondholders.

OUTLOOK

The outlook for Puerto Rico and its related debt remains negative, because of trends such as weakening liquidity and economic deterioration, which we believe may further heighten default probabilities and further reduce bondholder recovery prospects in coming months.

WHAT COULD MAKE THE RATING GO UP

• Restoration of sufficient liquidity position to prevent defaults
• Enactment of sustainable fiscal plan that moves toward structural balance while meeting financial obligations

WHAT COULD MAKE THE RATING GO DOWN

• For legally protected securities (primarily GO and COFINA), indications of growing default risk
• Rising loss-given-default expectations on lower-rated securities

OBLIGOR PROFILE

Puerto Rico is a territory of the United States, with a population of 3.5 million (and an estimated population decline of 1.4% in 2014). The island has a high unemployment rate of 11.8%, high debt and pension metrics, and a declining economy.

LEGAL SECURITY

This action affects many of the commonwealth's securities, including the GO debt, which is a full faith and credit obligation of the commonwealth.

RATINGS AFFECTED

Downgraded to Caa2:
COFINA Senior (from B3)
Puerto Rico Industrial Development Company (from B3)
Commonwealth general obligation and guaranteed (from Caa1)
Aqueduct and Sewer Authority (from Caa1)

Downgraded to Caa3:
Municipal Finance Agency (from Caa1)
University of Puerto Rico -- System Revenue Bonds (from Caa2)

Downgraded to Ca:
University of Puerto Rico -- Educational Facilities Revenue Bonds (from Caa3)
Commonwealth's appropriation-backed debt (from Caa2)
Government Development Bank debt (from Caa1)
Highways and Transportation Authority (from Caa2)
Infrastructure Financing Authority -- rum tax bonds (from Caa2)
Pension Funding Bonds (from Caa2)
Convention Center District Authority (from Caa2)

Approximately $54.8 billiion in debt affected as Moody's downgrades Puerto Rico Government Development Bank notes to Ca from Caa1 and General Obligation bonds to Caa2 from Caa1. The outlook is negative, says Moody's.

Puerto Rico Cut to Caa2 by Moody's