Puerto Rico MOODY'S COMMENTS ON PUERTO RICO GOVERNMENT SHUT-DOWN
Global Credit Research
Rating Update
2 MAY 2006
Rating Update: Puerto Rico (Commonwealth of)
MOODY'S COMMENTS ON PUERTO RICO GOVERNMENT SHUT-DOWN
Baa2 rating remains on Watchlist for possible downgrade
State
PR
Opinion
NEW YORK, May 2, 2006 -- The Governor of Puerto Rico has this week closed the island's public schools, as well as a number of other government agencies and departments, citing a lack of current budgetary funds and lack of legislative authorization for the Government Development Bank (GDB) to make a budget loan to the government. A reported 95,000 public employees, or roughly half of the central government workforce, are not working and will not be paid for the shut-down period. Moody's notes that the shut-down is a first in Puerto Rico, and is also notable for its size, affecting almost 10% of total employment on the island.
COMMONWEALTH ASSURES THAT ALL BOND PAYMENTS WILL BE MADE ON TIME
Despite the governmental crisis, GDB officials have issued assurances to investors that all government bond payments will be made this year. There are moderate monthly set-asides remaining to be made on G.O. bonds for payment to investors on July 1, required funds have already been set-aside to cover a similar July 1 payment on the Public Building Authority's bonds, and there are no payments due on the Public Finance Corporation's appropriation bonds until August 1 (to be made from fiscal 2007 budgetary funds). The GDB also reports that set-asides will be made as scheduled for the $1 billion Fiscal 2006 TRAN notes. In fact, more than $500 million has already been set-aside in the dedicated TRAN payment fund, which is held by the GDB. The TRANs are secured by a syndicated bank letter of credit facility and do not carry an underlying rating from Moody's.
RATING REMAINS ON WATCHLIST
At this time, the Commonwealth's rating remains on Watchlist. We view the current situation as a high-stakes effort to force a resolution of the Commonwealth's longer term budget issues in the context of the fiscal 2006 budget loan request. If this is not productive, or if the political stalemate continues beyond a relatively short period of time, the rating implications will be negative.
COMMONWEALTH UNABLE TO AGREE ON BUDGET AND FISCAL REFORMS
The government shut-down is an unexpected development, and indicates that the debate between the Governor and Legislature over issues of budget and tax reform is more intractable than has previously been represented. When Moody's placed the Commonwealth's Baa2 general obligation rating on Watchlist for possible downgrade in February, it was based on expectations that the government's multi-year pattern of large budget deficits and deficit borrowings would continue in 2006 and possibly beyond. The major uncertainty, and cause of rating pressure, was whether the government would be willing and able to implement corrective actions strong enough to materially reduce the deficit in fiscal 2007 and project a path to achieving structural budget balance within a reasonable time frame.
Both the Governor and the Legislature made public representations of their commitment to work together in 2006 to implement the budget and fiscal reforms necessary to rebalance the budget. A Joint Resolution to this effect was passed overwhelmingly by the Legislature and signed by the Governor in November 2005, and was presented as an historic cooperative achievement. The current situation is a stark contrast to the representations contained in that Joint Resolution and indicates that the parties are not in accord on how to solve the Commonwealth's fiscal problems.
2006 CASH SHORTFALL CONSISTENT WITH PRIOR PROJECTIONS
From a purely financial perspective, the shortage of budgetary funds in the final two months of the fiscal year is not surprising given the Commonwealth's large and well-known budget imbalance. As reported by Moody's in February, annual general fund spending has been running more than 10% over current taxes and other recurring sources of revenue. As a result, it has been clear for several months that a budget loan of at least $500 million - on top of $384 million of G.O. restructuring funds already extended by the GDB earlier in the year - would be required to meet all fiscal 2006 expenses and repay $1 billion of publicly-issued short-term cash flow notes. It is also clear that the roughly $9 million of daily payroll savings from the government shut-down - even in the highly unlikely event it continued for the remaining two full months of the fiscal year - would not be sufficient to balance this year's budget. Eventually, GDB assistance in some form, and/or other measures such as delaying vendor payments and tax refunds, appears to be necessary. For a full listing of Puerto Rico government bonds on Watchlist for possible downgrade, please see our February 23 Rating Update report on the Commonwealth. Approximately $24 billion of government debt is affected.
Analysts
Timothy Blake
Analyst
Public Finance
GroupMoody's Investors Service
Emily Raimes
Backup Analyst
Public Finance
GroupMoody's Investors Service
Robert A. Kurtter
Senior Credit Officer
Public Finance
GroupMoody's Investors Service
Contacts
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
Rating Update
2 MAY 2006
Rating Update: Puerto Rico (Commonwealth of)
MOODY'S COMMENTS ON PUERTO RICO GOVERNMENT SHUT-DOWN
Baa2 rating remains on Watchlist for possible downgrade
State
PR
Opinion
NEW YORK, May 2, 2006 -- The Governor of Puerto Rico has this week closed the island's public schools, as well as a number of other government agencies and departments, citing a lack of current budgetary funds and lack of legislative authorization for the Government Development Bank (GDB) to make a budget loan to the government. A reported 95,000 public employees, or roughly half of the central government workforce, are not working and will not be paid for the shut-down period. Moody's notes that the shut-down is a first in Puerto Rico, and is also notable for its size, affecting almost 10% of total employment on the island.
COMMONWEALTH ASSURES THAT ALL BOND PAYMENTS WILL BE MADE ON TIME
Despite the governmental crisis, GDB officials have issued assurances to investors that all government bond payments will be made this year. There are moderate monthly set-asides remaining to be made on G.O. bonds for payment to investors on July 1, required funds have already been set-aside to cover a similar July 1 payment on the Public Building Authority's bonds, and there are no payments due on the Public Finance Corporation's appropriation bonds until August 1 (to be made from fiscal 2007 budgetary funds). The GDB also reports that set-asides will be made as scheduled for the $1 billion Fiscal 2006 TRAN notes. In fact, more than $500 million has already been set-aside in the dedicated TRAN payment fund, which is held by the GDB. The TRANs are secured by a syndicated bank letter of credit facility and do not carry an underlying rating from Moody's.
RATING REMAINS ON WATCHLIST
At this time, the Commonwealth's rating remains on Watchlist. We view the current situation as a high-stakes effort to force a resolution of the Commonwealth's longer term budget issues in the context of the fiscal 2006 budget loan request. If this is not productive, or if the political stalemate continues beyond a relatively short period of time, the rating implications will be negative.
COMMONWEALTH UNABLE TO AGREE ON BUDGET AND FISCAL REFORMS
The government shut-down is an unexpected development, and indicates that the debate between the Governor and Legislature over issues of budget and tax reform is more intractable than has previously been represented. When Moody's placed the Commonwealth's Baa2 general obligation rating on Watchlist for possible downgrade in February, it was based on expectations that the government's multi-year pattern of large budget deficits and deficit borrowings would continue in 2006 and possibly beyond. The major uncertainty, and cause of rating pressure, was whether the government would be willing and able to implement corrective actions strong enough to materially reduce the deficit in fiscal 2007 and project a path to achieving structural budget balance within a reasonable time frame.
Both the Governor and the Legislature made public representations of their commitment to work together in 2006 to implement the budget and fiscal reforms necessary to rebalance the budget. A Joint Resolution to this effect was passed overwhelmingly by the Legislature and signed by the Governor in November 2005, and was presented as an historic cooperative achievement. The current situation is a stark contrast to the representations contained in that Joint Resolution and indicates that the parties are not in accord on how to solve the Commonwealth's fiscal problems.
2006 CASH SHORTFALL CONSISTENT WITH PRIOR PROJECTIONS
From a purely financial perspective, the shortage of budgetary funds in the final two months of the fiscal year is not surprising given the Commonwealth's large and well-known budget imbalance. As reported by Moody's in February, annual general fund spending has been running more than 10% over current taxes and other recurring sources of revenue. As a result, it has been clear for several months that a budget loan of at least $500 million - on top of $384 million of G.O. restructuring funds already extended by the GDB earlier in the year - would be required to meet all fiscal 2006 expenses and repay $1 billion of publicly-issued short-term cash flow notes. It is also clear that the roughly $9 million of daily payroll savings from the government shut-down - even in the highly unlikely event it continued for the remaining two full months of the fiscal year - would not be sufficient to balance this year's budget. Eventually, GDB assistance in some form, and/or other measures such as delaying vendor payments and tax refunds, appears to be necessary. For a full listing of Puerto Rico government bonds on Watchlist for possible downgrade, please see our February 23 Rating Update report on the Commonwealth. Approximately $24 billion of government debt is affected.
Analysts
Timothy Blake
Analyst
Public Finance
GroupMoody's Investors Service
Emily Raimes
Backup Analyst
Public Finance
GroupMoody's Investors Service
Robert A. Kurtter
Senior Credit Officer
Public Finance
GroupMoody's Investors Service
Contacts
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
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