Puerto Rico Gov. Alejandro Garcia Padilla came out swinging with a defense of his economic and fiscal programs after Moody's Investors Service lowered the island's credit ratings farther into junk territory.
The rating action, which affected $61 billion of debt, "is unfair to the people of Puerto Rico and disregards the hard work undertaken to date to get the finances of the commonwealth in order," Gov. Alejandro García Padilla said in a speech late Tuesday. "I'm extremely disappointed that Moody's has ignored the facts in their decision to downgrade Puerto Rico's credit," he said. "Puerto Rico has taken significant and important steps to cover our expenses without recourse to new loans, while safeguarding vital public services."
Moody's on Tuesday downgraded Puerto Rico's general obligation rating to B2 from Ba2. It dropped the commonwealth's COFINA sales tax senior bond rating to Ba3 from Baa1, Government Development Bank notes to B3 from Ba2, and many public corporation bonds to Caa1 or Caa2.
Moody's cited the recently adopted public corporation debt restructuring law for the GO rating cut, even though the law explicitly excludes the debt of the commonwealth government proper.
The "new law marks the end of the commonwealth's long history of taking actions needed to support its debt. It signals a depleted capacity for revenue increases and austerity measures, and a new preference for shifting fiscal pressures to creditors, which, in our view, has implications for all of Puerto Rico's debt, including that of the central government," the Moody's analysts wrote.
The governor, threatening to sue the rating agency, shot back: "Moody's has taken this action immediately after Puerto Rico passed its first balanced budget in 22 years. They do it when the economy is better and unemployment is lower than a year and a half ago. They do it when crime on the island is lower than a year and a half ago.
"They do this when energy costs are lower than a year and a half ago. They do this when the general obligations bonds of Puerto Rico have begun selling at their best price in a while. They do this when we have taken care of the crisis of the retirement systems.
"They do it after we passed the law that puts fiscal sustainability safeguards on the vast majority of public corporations. And they have done so after we created a legal structure that did not exist, which helps deal with any possible insolvency of a public corporation that is no longer safe," Garcia Padilla said. "For these reasons, and others, I have instructed the Justice Secretary to assert the truth and clear the good name of Puerto Rico. That credit agency, and any other entity acting alike, will have to answer for this offense."
Moody's declined to respond to the governor's statement.
The public corporation debt restructuring bill "protects the General Fund, the GDB and the commonwealth's credit, and in no way indicates any shift in the commonwealth's historical and constitutionally supported commitment to honoring its financial obligations," GDB chairman David Chafey said Tuesday evening.
After the downgrade, Puerto Rico Treasury Secretary Melba Acosta Febo pointed to the balanced budget the governor signed Tuesday as "another significant achievement by this administration to protect the credit of the Commonwealth of Puerto Rico.
"By giving public corporations the opportunity to overcome their financial challenges, the Recovery Act [for restructuring public corporation debt] can give those public corporations in true need the tools to show once and for all that they will not be a drain on the General Fund now, or down the road," Acosta Febo wrote in an op-ed in El Nuevo Día newspaper.
For the public authorities in financial stress, "the Recovery Act is an essential tool to ensure [customer] rate hikes don't become the answer," she wrote.
With the public corporation restructuring law and the Moody's downgrades, things may be more difficult for the commonwealth, analysts said.
"The act is a pivot away from the island's longstanding pledge to honor all debt obligations," said Municipal Market Advisors managing director Robert Donahue. "Moody's super-downgrades [Tuesday] will undoubtedly hurt Puerto Rico's ability to raise capital for the near term."
Puerto Rico has talked about selling additional bonds in the new fiscal year, Donahue noted. "Given these low ratings and the deteriorating views of Puerto Rico's willingness to pay all debt obligations, the island is probably going to have to seek alternative avenues to meet its financing needs."
AllianceBernstein director of municipal credit research Joseph Rosenblum said Puerto Rico's situation was weak quite apart from Moody's downgrades.
"Pricing in the market has for some time ignored the ratings and most analysts have relied on their own analysis," he said. "In my opinion, Puerto Rico's regaining of market access will not be easy and will not be driven by their bond ratings.
Rosenblum continued: "A weak economy with the problem of continued population losses and no clear sign of what will drive economic growth in the near term combined with questions about their liquidity on top of lack of transparency argues for a very weak credit assessment. The price of the bonds in the market confirms that. Not sure if the restructuring law addresses these issues longer term."
Joan Vidra, managing director of Opportunities Emerging & Frontier Markets Advisory LLC, said she was "not totally convinced [Puerto Rico] needed to pass a law to restructure the debt given the constitutional questions.
"I think there is a high likelihood the law will be shut down on several counts," she said. "Bankruptcy is a matter for federal government, namely, and also clearly this was not a last resort. Nothing was done to make it easier for PREPA to pay its debts. This situation was avoidable. "
Vidra added that the "riskiness for GOs has increased, but not to the extent warranting this steep rating action in my opinion."
A Moody's spokesman, asked whether it was fair to downgrade Puerto Rico for taking steps the rating agency has advocated in the past, such as ending the provision of liquidity, capital financing and operating subsidies, often through the GDB, to various public corporations, responded in an email:
"The new information now is that the GDB and the commonwealth have ended that support, not because the public corporations no longer need it, but because the financial position of the commonwealth and the liquidity position of the GDB mean they can no longer provide it. The law is a reflection not just of the weakness at the public corporations, but across the issuing entities."
The Bond Buyer also asked whether Puerto Rico should be downgraded over market-access concerns, given that the commonwealth sold $3.5 billion of general obligation bonds in March and may not need capital soon.
"We believe a debt restructuring at public corporations could further limit the market access of all Puerto Rico issuers," Moody's said. "Our analysis incorporates the view that the $3.5 billion bond sale in March temporarily stabilized the commonwealth's liquidity, and that other debt issuances could similarly help preserve Puerto Rico's liquidity position. Inability to sell additional debt in the bond market because of a default would likely lead to faster erosion of cash."
Robert Slavin is a reporter for Bond Buyer.
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