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Moody’s Revises Puerto Rico’s Outlook to Developing from Negative

By on July 2, 2016

SAN JUAN – Moody’s Investors Service has revised the outlook on Puerto Rico, as well as seven affiliated obligors, to “developing” from negative, while affirming the ratings of those entities, based on the U.S. government’s June 30 enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA). The rating action did not involve the Puerto Rico Electric Power Authority (Prepa), rated Caa3 with a negative outlook.

The law will reduce the risk of protracted litigation, which the credit-rating company says “would be the most likely outcome in the absence of a clear legal framework in which to restructure Puerto Rico’s debt.”

A Moody’s news release on the rating action reads: “While offsetting this risk appears positive for overall recovery prospects, the oversight board created by PROMESA will have wide authority in shaping how an eventual debt restructuring plays out. The board could seek to address pension benefits, and it could try to adhere strictly to legal supports for certain debt types, widening their recovery premium over other bonds. While the creation of the board clearly may cause changes to bondholder recovery prospects, it is premature to estimate what those changes will be.”

A sign for Moody's Corp. is shown Aug. 13, 2010 in New York. Moody's Investors Service is a credit rating agency. (AP Photo/Mark Lennihan)

(AP Photo/Mark Lennihan)

Here are excerpts from Moody’s rating news:

Rating Outlook

The “developing” outlook signals that although the removal of legal uncertainties may prevent Puerto Rico’s credit from further deterioration, the risks of default and loss remain elevated. Federal intervention may improve aggregate investor recoveries by providing for an efficient resolution of Puerto Rico’s crisis and taking steps to halt the decline of its economic base. Implications for specific bondholder types will become more clear as the oversight board is constituted and takes its first actions.

Factors that Could Lead to an Upgrade

Restoration of liquidity position and fiscal performance sufficient to prevent additional defaults

Reductions in Puerto Rico’s pension funding burden as part of the debt restructuring process

Indications that, because of the actions of a court or other authority, bondholder recoveries will be greater than currently anticipated

Any federal government assistance that improves bondholder recovery prospects

Factors that Could Lead to a Downgrade

Unilateral actions by the control board or a judicial authority that point to decreased bondholder recoveries

Negotiated restructuring efforts that, although agreed to, result in reduced recoveries

Protracted legal confrontations during which payment of debt service is suspended

Legal Security

Various, including the commonwealth’s general obligation (GO) pledge, and pledges of specific tax revenues.

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