Puerto Rico Governor Alejandro Garcia Padilla late yesterday said that he had directed the Secretary of Justice to sue national government credit rating agency Moody’s after it downgraded insular government bonds three notches because of the law he signed late Saturday providing processes for the debt and other obligations of a number of the government’s public corporations to be reduced.
He also said that other credit rating agencies — which are private analytical firms serving investors — would be taken to court if they reached findings similar to Moody’s and challenged Wall Street credit analysts to run for office in Puerto Rico “if they want to run” the territory.
Moody’s Investor’s Service downgraded Puerto Rico bonds further into to junk status hours after Garcia Padilla signed the law, saying, “By providing for defaults by certain issuers that the central government has long supported, Puerto Rico’s 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 action is the latest in a series of negative credit rating agency actions in response to the law Garcia proposed a week ago and the Legislative Assembly passed that day. The Governor said that the Government was taking legal action because Moody’s had spread untruthful information and was tarnishing the Commonwealth’s good name.
Explaining the law, House of Representatives Treasury and Budget Committee Chairman Rafael Hernandez said yesterday that “The Electric Power Authority [PREPA] is headed for collapse in the next 30 days. That’s why this law was passed in this session.” The session ended June 30th and the legislature is not scheduled to reconvene until August.
The PREPA board met Sunday in a closed session for a briefing on the utility’s finances. With a $10 million credit line loan payment to Citibank due tomorrow and a total of $146 million in payments to Citi owed this month and next and $525 million to be paid to Scotiabank next month, there are questions about PREPA’s ability to pay all of its obligations. The banks have not yet agreed to extend the credit despite extensive efforts by PREPA. The new law, however, could provide new incentive for the banks, which would face losses if PREPA takes advantage of its new power to have its obligations reduced through the law.
In late May, PREPA had to transfer $100 million in bond proceeds for infrastructure to its operating account to pay $60 million for oil, used to generate 69% of the electricity that it produces. The transfer was supposed to be repaid within a month. A board member said then that PREPA’s cash on hand was sometimes as low as $4 million. Its executive director primarily attributes the cash problems to non-payments by other government entities.
Secretary of Justice Cesar Miranda Monday expressed confidence that the restructuring law would withstand legal challenge in response to the suit filed in Federal court hours after the Governor signed the law by Franklin Templeton and Oppenheimer Rochester funds, which own $907.2 million and $821.4 million in PREPA bonds, respectively. The suit claims that it law violates the Bankruptcy, Takings, and Contracts Clauses of the U.S. Constitution. The Government had contracts with national law firms in drafting the law totaling $3.6 million for the past several months through, anticipating litigation that could go to the U.S. Supreme Court. The total does not include the $1.9 million in contracts with the firm specializing in restructuring guiding the process.
Officials expected credit rating agency downgrades of bonds issued by PREPA and other public corporations, such as the Highway and Transportation and Aqueduct and Sewer Authorities, in response to the law. They were not expecting negative action on Puerto Rico’s Government Obligation (GO) and sales and use tax (COFINA) bonds.
They had been hoping that the law and the Governor’s pledge that a balanced budget without borrowing would be enacted for Fiscal Year 2015 would instill greater confidence in the credit of the central government. They are now touting the $9.565 billion budget enacted into law June 30th for the fiscal year that began yesterday as “balanced.” The budget is about $200 million less than last fiscal year’s with spending cuts of some $1.357 billion, increased taxes of approximately $500 million, and $550 million more budgeted for meeting bond obligations. But the budget is also using $269.8 million of March’s $3.5 billion GO bond sale and delaying $75 million in agency repayments to the Government Development Bank (GDB) and payments to government retirement funds.
Analysts also say that the budget’s revenue projections are unrealistically high by what may be hundreds of millions of dollars, in part because the tax increases will put a further drag on the territory’s economy. The budget was revised from Gov. Garcia Padilla’s proposal April 29th when it became clear that Fiscal Year 2014 tax collections would be hundreds of millions of dollars short.
The FY 2015 revenue estimates are using the Planning Board’s projection of a .2% growth in the insular economy. Most non-administration economists, however, estimate continued shrinkage in the economy of between 1.5% to 2%.
The private economists’ more negative view seems to have been supported Friday night when the GDB released its Puerto Rico Economic Activity Index (EAI) for May. The number was 1.1% lower than in May 2013 after an April year-over-year decrease of 1.3% and 16 prior months of straight declines. Cement sales were the big drag on the EAI, although electricity generation and gasoline consumption were also down. There was, however, a tiny increase in non-farm employment year over year due to private sector hiring.