Fitch: Puerto Rico Appropriation Debt Default Highlights Liquidity Strain & Government Priorities

NEW YORK--()--In Fitch Ratings' opinion, Puerto Rico's reported decision to miss an August 1 debt service payment on appropriation-backed debt (not rated by Fitch) due today is consistent with both the commonwealth's stated intent to restructure its debt and its current liquidity pressures. Fitch rates the commonwealth's General Obligation (GO) and related debt 'CC' ; Rating Watch Negative, which indicates Fitch's belief that default of some kind appears probable. The payment default on appropriation-backed debt has no direct effect on Fitch's commonwealth ratings (listed below), but does highlight the factors that underpin the Negative Watch.

As the commonwealth's restructuring plans become clearer, a downgrade to 'C' would be triggered on a security-specific basis at the point that default appears inevitable. The commonwealth has declared its debt unpayable in aggregate without distinction among its numerous securities. Therefore, at this stage Fitch does not believe that there is sufficient information available to consider default of any of the specific credits that Fitch rates to be inevitable. Fitch's public finance ratings do not address the loss given default of the rated liability.

Although Fitch does not rate appropriation-supported debt of the commonwealth, its rating methodology recognizes the weaker security provided to holders of appropriation debt and a higher risk of default on such debt relative to GO and dedicated tax-secured debt. Repayment of this debt is contingent on appropriation by the governing body, which is not a requirement for GO and dedicated tax debt. From a legal perspective, the contrast is particularly stark in Puerto Rico, where GO debt has been promised a constitutional first-claim on revenues. Fitch notes that the commonwealth reportedly is making payment on other debt as due.

Following is the list of commonwealth credits rated by Fitch, all at 'CC'; Rating Watch Negative:

-- Commonwealth of Puerto Rico GO and GO-guaranteed bonds;

-- Puerto Rico Sales Tax Financing Corporation (COFINA) senior and subordinate lien sales tax revenue bonds;

-- Employees Retirement System of the Commonwealth of Puerto Rico (ERS) pension funding bonds;

-- Puerto Rico Aqueduct and Sewer Authority (PRASA) senior lien revenue bonds;

-- Puerto Rico Electric Power Authority (PREPA) power revenue bonds.

Fitch does not rate any other dedicated tax or appropriation-secured debt of the commonwealth.

For more information, see 'Fitch Downgrades Puerto Rico's GO and Related Ratings to 'CC'; Maintains Rating Watch Negative' dated June 29, 2015, available at www.fitchratings.com.

Additional information is available on www.fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst (GO, COFINA, ERS)
Laura Porter
Managing Director
+1-212-908-0575
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Primary Analyst (PRASA)
Doug Scott
Managing Director
+1-512-215-3725
or
Primary Analyst (PREPA)
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst (GO, COFINA, ERS)
Laura Porter
Managing Director
+1-212-908-0575
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Primary Analyst (PRASA)
Doug Scott
Managing Director
+1-512-215-3725
or
Primary Analyst (PREPA)
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com