Investing.com -- Moody's lowered its outlook for Puerto Rico, along with seven other affiliated obligors from developing to negative, as the commonwealth failed to pay almost half of a $2 billion payment due on Friday, marking its first-ever default on its constitutionally guaranteed debt.
The action came one day after U.S. president Barack Obama signed the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) into law on Thursday. The bipartisan legislation establishes a board, which will construct a systematic plan for debt restructuring on the island, as well as an annual budget. The rating action did not involve debt for Puerto Rico's Electric Power Authority (PREPA), which is rated Caa3, with a negative outlook, Moody's said in a statement.
"The law will reduce the risk of protracted litigation, which would be the most likely outcome in the absence of a clear legal framework in which to restructure Puerto Rico's debt. While offsetting this risk appears positive for overall recovery prospects, the oversight board created by PROMESA will have wide authority in shaping how an eventual debt restructuring plays out," Moody's said.
On Thursday, Puerto Rico governor Alejandro Garcia Padilla issued an executive order after Obama approved the restructuring measure, which suspended payments on general obligations for a number of leading public agencies throughout the commonwealth. Padilla's order is applicable to debt payments involving the island's employees' retirement system, the Puerto Converntion Center District Authority and the University of Puerto Rico among others.
In lowering its outlook, Moody's cited downside risks such as negotiated restructuring efforts that could result in reduced recoveries, unilateral actions by a judicial authority that could decrease bondholder recoveries and a protracted legal battle which could suspend further debt service payments.
"The board could seek to address pension benefits, and it could try to adhere strictly to legal supports for certain debt types, widening their recovery premium over other bonds," Moody's added. "While the creation of the board clearly may cause changes to bondholder recovery prospects, it is premature to estimate what those changes will be."
In total, Puerto Rico government owes more than $70 billion of debt, with a debt-to-GDP ratio of approximately 68%.