SAN JUAN – Standard & Poor’s has downgraded nearly all of Puerto Rico’s tax-backed debt to its second-lowest rung, while the agency’s negative outlook for the U.S. commonwealth’s credit rating indicates a further drop is probable.
“We believe a default or restructuring is highly likely and could take the form of either a missed debt service payment or a distressed exchange that we would characterize as a default,” the New York-based ratings agency said in a statement on Thursday.
This week, the Puerto Rican government proposed restructuring $47 billion in public debt, or 65 percent of the total, and asked bondholders to agree to a five-year deferment of some $13 billion in debt, or around 72 percent of what the island is currently scheduled to repay during that period.
Puerto Rico unveiled the proposal after adopting various austerity measures, which have not included layoffs of workers in the public sector, the island’s biggest employer, and pursuing initiatives aimed at restoring economic growth after nearly a decade of recession.
In its report, S&P warned that that plan means that “all of Puerto Rico’s tax-backed debt is highly vulnerable to nonpayment.”
That includes so-called general obligation debt, repayment of which is backed by Puerto Rico’s constitution and is to take priority over any other public expenditures.
In justifying the downgrade from CCC- to CC, S&P noted that Gov. Alejandro Garcia Padilla warned Wednesday that if creditors did not agree to participate in restructuring talks, the government would have to proceed without them even if that meant “years of litigation and defaults.”
One of the other Big Three credit rating agencies, Moody’s, said on Wednesday it was unlikely that holders of Puerto Rico’s bonds would agree to negotiate with the government under the terms it is proposing and warned that it could further downgrade the island’s credit rating.