Moody’s Downgrades Puerto Rico Debt After Hurricane María
The credit-rating company also took action on its classification of eight other security types, such as senior bonds issued by the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) and the Puerto Rico Aqueduct and Sewer Authority (Prasa), both of which were also downgraded to Ca from Caa3. University of Puerto Rico bonds were downgraded as well, to C from Ca.
Moody’s has kept its outlook on these securities negative, citing “economic pressures, which will weigh on the commonwealth’s capacity to meet debt and other funding obligations, potentially driving bondholder recovery rates lower as restructuring of the commonwealth’s debt burden unfolds.”
“The lower ratings are aligned with our estimates of Puerto Rico’s reduced debt servicing capacity given extensive damage from Hurricane Maria. Puerto Rico faces almost total economic and revenue disruption in the near term and diminished output and revenue probably through the end of the current fiscal year and maybe well into the next.
“The weaker trajectory will undercut the government’s ability to repay its debt, a matter now being weighed in a bankruptcy-like proceeding authorized by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). For the University of Puerto Rico, the downgrade factors in expected pressure on enrollment-linked revenue and on funding from the Puerto Rican government,” Moody’s wrote Thursday.
Its analysts are also concerned that the widespread damage wrought by the historic hurricane could trigger an increasingly larger exodus of people.
“On one hand, a massive exodus of residents relocating to the mainland, rather than rebuilding on the island, could further erode Puerto Rico’s economic base. On the other, an infusion of federal relief and rebuilding funds could spur the economic growth and infrastructure replacement that, under normal conditions, has eluded Puerto Rico. We nevertheless view the economic impact overall as a substantial negative that has weakened the commonwealth’s ability to repay creditors,” it concludes.
Any action in the island’s debt restructuring process that “points to stronger-than-anticipated bondholder recoveries” could lead to an upgrade some of the securities’ ratings. However, an even lower repayment capacity due to higher “essential service spending or reduction in revenue” could lead to further downgrades.
The following affected securities have a combined par value of about $31 billion:
Debt Type – From – To – Par Amt (Billions)
General Obligation – Caa3 – Ca – $13.3
GO-Guaranteed Bonds – Caa3 – Ca – $4.8
COFINA Senior – Caa3 – Ca – $7.6
Puerto Rico Aqueduct and Sewer Authority – Caa3 – Ca – $3.3
Puerto Rico Industrial Development Co. – Ca – C -$0.2
Municipal Finance Agency – Ca – C – $0.6
Highways and Transportation Authority, 1968 Resolution bonds – Ca – C – $0.8
University of Puerto Rico – System Revenue Bonds – Ca – C – $0.4
University of Puerto Rico – Facilities Revenue Bonds – Ca – C – $0.1