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Puerto Rico Re-Junked, This Time By Moody's - Full Report

Tyler Durden's picture




 

Three days ago it was S&P that opened the can of Puerto Rico junk worms. Moments ago it was Moody's turn to downgrade the General Obligation rating of the Commonwealth from Baa3 to Ba2, aka junk status. We note this just in case someone is confused what the catalyst was that just sent stock to a new intraday high in the aftermath of today's disappointing jobs number which until this moment barely managed to push the S&P higher by 1%.

 

Muni bonds, having shrugged off the initial downgrade, are starting to crack as the looming fear of forced (mandate-driven) sales rise rapidly... the 2017s tumbled over 4 points today!

 

 

Full release:

Moody's downgrades Puerto Rico GO and related bonds to Ba2, notched bonds to Ba3 and COFINA bonds to Baa1, Baa2; outlook negative

 Approximately $55B of rated debt affected

New York, February 07, 2014 -- Moody's Investors Service has downgraded the general obligation (GO) rating of the Commonwealth of Puerto Rico to Ba2 from Baa3. Ratings that are capped by or linked to the commonwealth's GO rating were also downgraded two notches, with the exception of the Puerto Rico Aqueduct and Sewer Authority (PRASA) Revenue Bonds, which were downgraded to Ba2 from Ba1. At the same time, Moody's downgraded the Puerto Rico Sales Tax Financing Corporation's (COFINA's) senior-lien bonds to Baa1 from A2 and its junior-lien bonds to Baa2 from A3. The outlooks for ratings on the GO and the related bonds, as well as the COFINA bonds, are negative. For the ratings affected by this action, all of which were placed on review on December 11, 2013, see the list at the end of this report.

SUMMARY RATING RATIONALE

The problems that confront the commonwealth are many years in the making, and include years of deficit financing, pension underfunding, and budgetary imbalance, along with seven years of economic recession. These factors have now put the commonwealth in a position where its debt load and fixed costs are high, its liquidity is narrow, and its market access has become constrained. In the face of these problems, the administration has taken strong and aggressive actions to control spending, reform the retirement systems, reduce debt issuance, and promote economic development. Despite these accomplishments, however, in our view the commonwealth's credit profile is no longer consistent with investment grade characteristics.

While some economic indicators point to a preliminary stabilization, we do not see evidence of economic growth sufficient to reverse the commonwealth's negative financial trends. Without an economic revival, the commonwealth will face difficult decisions in coming years, as its debt and pension costs rise. The negative outlook signals the remaining challenges facing the commonwealth.

The commonwealth's general obligation bonds and all the notched and related ratings were downgraded by two notches, with the exception of the Puerto Rico Aqueduct and Sewer Authority (PRASA) Revenue Bonds, which were downgraded one notch, to Ba2. This brings them to the same rating as the commonwealth general obligation rating, which reflects recent rate increases enacted by the legislature that will improve net revenues and are expected to reduce the authority's reliance on commonwealth support.

CREDIT STRENGTHS

  • Politically and economically linked to the US, with benefit of the nation's strong financial, legal, and regulatory systems
  • Large economy, with gross product exceeding that of 15 US states and population exceeding that of 22 US states
  • Broad legal powers to raise revenues, adjust spending programs, and borrow to maintain fiscal solvency
  • Major actions taken to stabilize commonwealth finances, including significant reform to main pension system, and tax increases to reduce budget deficit

CREDIT CHALLENGES

  • Ongoing economic weakness due to long-term decline in dominant manufacturing sector, decreased competitiveness as a result of expired federal tax benefits, and high energy costs
  • Dependence on capital markets financing to fund operating expenses and debt service during period of increased risk of reduced market access
  • Very large unfunded pension liabilities relative to revenues, even after major reforms to two main plans that helped reduce cash-flow pressure
  • Very high government debt, equal to more than 50% of gross domestic product
  • Multi-year trend of large general fund operating deficits relative to revenues, financed by deficit borrowing

ACTION AFFECTS MULTIPLE CREDITS

The downgrade and negative outlook affect general obligation bonds of the commonwealth and of related entities listed below.

DOWNGRADED TO Ba2 FROM Baa3

  • General obligation bonds
  • Public Building Authority Bonds
  • Pension funding bonds
  • Puerto Rico Infrastructure Finance Authority (PRIFA) Special Tax Revenue Bonds
  • Convention Center District Authority Hotel Occupancy Tax Revenue Bonds
  • Government Development Bank (GDB) Senior Notes
  • Municipal Finance Authority (MFA) Bonds
  • Puerto Rico Highway and Transportation Authority (PRHTA) Transportation Revenue Bonds
  • Puerto Rico Aqueduct and Sewer Authority (PRASA) Commonwealth Guaranteed Bonds

DOWNGRADED TO Ba2 from Ba1

  • Puerto Rico Aqueduct and Sewer Authority (PRASA) Revenue Bonds

DOWNGRADED TO Baa1 from A2

  • Commonwealth of Puerto Rico Sales Tax Financing Corporation Senior Lien Bonds

DOWNGRADED TO Baa2 from A3

  • Commonwealth of Puerto Rico Sales Tax Financing Corporation Junior Lien Bonds

DOWNGRADED TO Ba1 FROM Baa2

  • Puerto Rico Highway and Transportation Authority (PRHTA) Highway Revenue Bonds

DOWNGRADED TO Ba3 FROM Ba1

  • Puerto Rico Public Finance Corporation (PRPFC) Commonwealth Appropriation Bonds
  • Puerto Rico Highway and Transportation Authority (PRHTA) Subordinate Transportation Revenue Bonds

OUTLOOK

The rating outlook is negative, based on our expectation of continued economic stagnation or decline. The outlook also incorporates continuing demands on liquidity, increased refinancing risk and constrained market access.

WHAT COULD MAKE THE RATING GO UP

  • Strong rebound in economic growth leading to improved and sustained financial performance
  • A trend of declining debt

WHAT COULD MAKE THE RATING GO DOWN

  • Evidence of further constraints on market access or significant further weakening of GDB liquidity
  • Indication that total fixed costs, including pension contributions and debt service on bonded debt, have become unaffordable
  • Steep growth in structural budget gap and an increase in GAAP deficits, solved with non-recurring solutions
  • Economic weakness resulting in declining revenues and continued out-migration
  • Reacceleration of growth in government debt
 

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Fri, 02/07/2014 - 14:53 | 4412622 Say What Again
Say What Again's picture

This explains why ES is ripping up today

Shoulda BTFD the other day -- NOT

Fri, 02/07/2014 - 14:52 | 4412635 Dr. Engali
Dr. Engali's picture

I did.

Fri, 02/07/2014 - 15:06 | 4412692 Hippocratic Oaf
Hippocratic Oaf's picture

Not too much of a sell-off doc, if you buy the right insurer, you'll be ok.

Just ride the wave.

Fri, 02/07/2014 - 18:27 | 4413402 Emergency Ward
Emergency Ward's picture

Hot investment UBS Proprietary Puerto Rico Closed-End 53%-leveraged Bond Funds pushed for mom and pop's retirement fund.  This is not bullshit.

Fri, 02/07/2014 - 14:57 | 4412649 Vampyroteuthis ...
Vampyroteuthis infernalis's picture

Even after Lehman Bros it took a few days for the crap to poison the well. We have a relief rally today. End of Feb? Hold onto your pants... I meant shorts!

Fri, 02/07/2014 - 15:02 | 4412680 max2205
max2205's picture

How much for the women

Fri, 02/07/2014 - 15:05 | 4412691 BandGap
BandGap's picture

You mean the little girls?

Fri, 02/07/2014 - 14:51 | 4412624 slotmouth
slotmouth's picture

I stand by Puerto Rico!  I plan to drink several rum and cokes tonight.

Fri, 02/07/2014 - 15:22 | 4412755 NoTTD
NoTTD's picture

That is the "Cuba Libre".

 

PR's drink is the Pina Colada.

Fri, 02/07/2014 - 22:12 | 4414153 jerry_theking_lawler
jerry_theking_lawler's picture

without the 'lime'...its just rum and coke.

Fri, 02/07/2014 - 14:54 | 4412625 Mercury
Mercury's picture

The inevitable bailout will include statehood.

Fri, 02/07/2014 - 18:47 | 4413492 Semi-employed W...
Semi-employed White Guy's picture

and two more Democrap Senators.  I don't think so though.  That would mean Puerto Ricans would have to pay income tax.  They don't want our taxes, just our welfare.  I say cut them loose and give them the independence they richly deserve!

Sat, 02/08/2014 - 15:17 | 4415346 MarsInScorpio
MarsInScorpio's picture

Semi:

 

YES!!

 

Cut them loose immediately. Let them figure out how to survivie on their own.

 

We don't need PR any longer - and if the military says it does,. a lease on a port complex is waaaaaay lower than the welfare we give to them now.

 

FREE PR!! STATEHOOD NOW!!

-30-

Fri, 02/07/2014 - 14:55 | 4412636 NOTaREALmerican
NOTaREALmerican's picture

"Investors" have already priced this into the "market".  

Fri, 02/07/2014 - 14:54 | 4412643 Dr. Engali
Dr. Engali's picture

Just borrow moar. That will fix it.

 

I'm Paul Krugman and I approved this message.

Fri, 02/07/2014 - 15:08 | 4412707 Ignatius
Ignatius's picture

Cancel the debts and redistribute some land.

Then prepare for invasion to "bring democracy" back to PR.

Fri, 02/07/2014 - 14:54 | 4412646 youngman
youngman's picture

Make Prostitution legal....that should pick up the Tourism business..why go to Bancock or Costa Rica...keep the money at home..kind of

Fri, 02/07/2014 - 15:10 | 4412717 donsluck
donsluck's picture

Or Nevada, or Mexico, or all of Central America, or Canada, all but three countries in South America, etc. etc.

Fri, 02/07/2014 - 20:01 | 4413799 TBT or not TBT
TBT or not TBT's picture

There should be a proliferation of casinos too. That would fuckin beautiful man.

Fri, 02/07/2014 - 14:57 | 4412665 Kaiser Sousa
Kaiser Sousa's picture

somebody's got some splanin' to do...

they should just secede and get rid of the debt anchor around their neck...

Fri, 02/07/2014 - 15:02 | 4412675 Iam Yue2
Iam Yue2's picture

Redux: "Could a Puerto Rico Default Hammer the $3.7 Trillion U.S. Muni Bond Market in 2014?"

http://www.forbes.com/sites/larrymcdonald/2014/01/03/puerto-rico-default...

Fri, 02/07/2014 - 15:05 | 4412682 Johnny Cocknballs
Johnny Cocknballs's picture

Dear Puerto Rico:

Get ahead of the curve.

Legalize, regulate, and tax marijuana.  Not just medical, goddamnit. 

Fri, 02/07/2014 - 15:04 | 4412684 TrustbutVerify
TrustbutVerify's picture

I got the bad news on Puerto Rico a few months ago from Kyle Bass on, I think, CNBC.  The rating agency downgrades are, as far as I can tell, simply catching up.  

Sat, 02/08/2014 - 15:30 | 4415385 MarsInScorpio
MarsInScorpio's picture

Trust:

 

PR is a highly volitile subject in American politics. There are a ton of PR voters in NYC, and they are a vrey vocal part of the Hispanic Racist movement. (Even though they express their own racism by using the name Latinos to differeniate themselves from Mexicans, and Centrral and South Americans. "We aren't one of them!! . . . "  /sarc )

 

Thus, it is politically dangerous to diss PR. The ratings agencies are only doing so because it will hurt their credibility more to not do it, then will the amount of trashing they take for doing it hurt them.

-30-

Fri, 02/07/2014 - 15:07 | 4412706 financialrealist
financialrealist's picture

"The problems that confront the commonwealth are many years in the making, and include years of deficit financing, pension underfunding, and budgetary imbalance, along with seven years of economic recession"

Why is Puerto Rico special?...sounds like the rest of the planet...

 

Fri, 02/07/2014 - 15:11 | 4412710 BurningFuld
BurningFuld's picture

They have gone from the commonwealth to the commonpoor.

Fri, 02/07/2014 - 15:50 | 4412863 TPTB_r_TBTF
TPTB_r_TBTF's picture

Puerto Pobre

Fri, 02/07/2014 - 19:55 | 4413785 TBT or not TBT
TBT or not TBT's picture

Sharing may well be caring, but it's also impoverishing.

Fri, 02/07/2014 - 15:12 | 4412718 Rising Sun
Rising Sun's picture

Puerto Rico needs some Fewd stamps and some Barry-care.

 

That cures all

Fri, 02/07/2014 - 15:21 | 4412749 NoTTD
NoTTD's picture

Can it be "de-junked"?  

 

Sounds painful.

Fri, 02/07/2014 - 15:33 | 4412806 Cacete de Ouro
Cacete de Ouro's picture

Short Frank Poncherello, Long Jon Baker

CHiPs

Fri, 02/07/2014 - 17:02 | 4413069 pashley1411
pashley1411's picture

Credit strenghs should have included that an island nation is physically easier to rope off and keep the remaining tax payers from fleeing to other polities.  See Cuba.

Puerto Rico should join the EU.   What's French for "our shit doesn't stink"?

Fri, 02/07/2014 - 19:51 | 4413749 TBT or not TBT
TBT or not TBT's picture

Notre merde ne pue pas.

Fri, 02/07/2014 - 19:55 | 4413773 TBT or not TBT
TBT or not TBT's picture

On dit plutot que ca shlingue, de memoire.

Fri, 02/07/2014 - 19:52 | 4413760 TBT or not TBT
TBT or not TBT's picture

.

Fri, 02/07/2014 - 19:55 | 4413776 NYer1
NYer1's picture

This has been built in in prices (and much more) since the summer so no wonder that there was a very muted reaction by the marketplace.

Most of the funds have already trimmed PR exposure very substantially and major wirehouses have been alerting their advisors  to do likewise or at least alert clients for a possible downgrade for months.

PR debt is trading at distressed levels already well before those downgrades and any deal that would raise some $1-$2 Bil in the coming months (even at high rates, as a kind of Mezzzanine financing) will aleviate much of the concerns for the next 2-3 years.

Given the significant steps PR has already taken which will probably balance its budget within a year or so and address structural financial problems there, this downgrade will be remembered as a Johnny come Lately and panicky one.

There are great deals to be had in INSURED PR bonds as well as secured bonds of COFINA>

Sat, 02/08/2014 - 15:27 | 4415371 MarsInScorpio
MarsInScorpio's picture

NYer1:

 

Let me guess: you work for the PR government, or you're part of a scam investing group looking for commissions until the whole thing collapses.

-30-

Fri, 02/07/2014 - 20:06 | 4413816 americanspirit
americanspirit's picture

Puerto Rico is circling the drain and there is no way for it to recover. All that's left is buzzards picking at the bones. If you leave your hotel on foot you will be robbed, at a minimum. If you're foolish enough to drive in town, you will be jacked. If you take the wrong taxi, you will very soon gain a few extra passengers at a stoplight and they will want everything you have on you.

If you drive a rental car anywhere outside San Juan you have a very good chance of encountering a roadblock. At that time all your money and jewelry will be taken at gunpoint or, if the roadblockers are campesinos, at machete point. You may or may not be killed. But if you are a woman, regardless, prepare to be raped by some very smelly guys, for sure. Oh, and don't try to run the block or turn around. They will have both routes covered with nail strips. They watch movies too. Runflat tires and bulletproof glass might be helpful, but just try renting a car equipped with those extras. Also, walks on remote beaches are not recommended, nor are walks on any beach after dark. Actually, best that you don't leave your hotel.

None of this ever appears in the news, but everyone who lives on the island knows.

Sun, 02/09/2014 - 00:32 | 4416649 gallistic
gallistic's picture

Wow! I did not know a human being could type a post with his head that far up his ass...

I see you are very ignorant and not well traveled.

Thanks for the laugh!

Sat, 02/08/2014 - 01:24 | 4414516 Redhotfill
Redhotfill's picture

I hear J-Lo will be selling Taco Flavored Keesis to  help eliminate debt in PR to up their bond ratings.

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