Statement on Commonwealth of Puerto Rico
October 11, 2013
As of August 31, 2013, Assured Guaranty insurance was in force on general obligations of the Commonwealth of Puerto Rico and various obligations of its instrumentalities; details on these credits and their security provisions may be found in the table below. $2.1 billion of the Assured Guaranty-insured debt is supported principally by a pledge of the good faith, credit and taxing power of the Commonwealth or by Commonwealth lease rental payments or appropriations. Puerto Rico’s Constitution provides that public debt constitutes a first claim on available Commonwealth resources. Public debt includes general obligation bonds and notes of the Commonwealth and payments required to be made under its guarantees of bonds and notes issued by its public instrumentalities. Of the remaining exposures, a significant portion ($2.9 billion) is secured by dedicated revenues such as special taxes, toll collections and revenues from essential utilities. In aggregate, Assured Guaranty had $5.5 billion of insurance in force related to Puerto Rico obligors.
Neither Puerto Rico nor its instrumentalities are eligible debtors under chapter 9 of the U.S. bankruptcy code.
Puerto Rico credits insured by Assured Guaranty are presently current on their debt service payments, and the Commonwealth has never defaulted on any of its debt payments. Further, 92% of Assured Guaranty’s exposure is rated investment grade internally and by both Moody’s and S&P, while 8%, substantially all of the balance of the exposure, is no more than one-notch below investment grade.
Over each of the last several years, Assured Guaranty has reduced its aggregate net par exposure to Puerto Rico credits, by approximately 17% since January 2010, and limited its insurance of new issues to transactions that refunded existing exposure, with a general focus on lowering interest rates.
We believe recent measures announced by the new Governor of Puerto Rico and his administration in adopting its fiscal 2014 budget in June reflect a strong commitment to improve the financial stability of the Commonwealth and several of its key authorities. In addition, other actions -- including plans to triple the excise tax on petroleum products, signed into law in June 2013; a 60% average rate increase for the Puerto Rico Aqueduct and Sewer Authority, implemented in July 2013; adoption in April 2013 of substantive pension reform plans that have been upheld by Puerto Rico’s Supreme Court; and the government’s reduction in the use of deficit financing and responsiveness to capital markets -- demonstrate that officials of the Commonwealth are focused on making the necessary choices to help Puerto Rico operate within its financial resources and maintain its access to the capital markets, which is a critical source of funding for the Commonwealth.
As always, investors in Commonwealth-related bonds insured by Assured Guaranty are protected by our unconditional guaranty that ensures receipt of their principal and interest payments on time and in full in accordance with the terms of Assured Guaranty’s insurance policies, and they are currently benefiting from the relative price stability of Assured Guaranty-insured Puerto Rico bonds compared with similar uninsured Puerto Rico obligations.
Details of Assured Guaranty’s Exposure to Municipal Credits in Puerto Rico
Exposure as of 8/31/13 ($ in millions); Ratings as of 10/10/13. For updated information, please see the most recent Assured Guaranty Ltd. Financial Supplement.
|
Exposure |
Security |
Net Par Outstanding |
Ratings |
|
Commonwealth of Puerto Rico |
The bonds are general obligations of the Commonwealth. The good faith, credit and taxing power of the Commonwealth are irrevocably pledged for the prompt payment of the principal of and interest on the bonds. The Constitution of Puerto Rico provides that public debt of the Commonwealth, which includes the bonds, constitutes a first claim on available Commonwealth resources. |
1,885 |
BBB- BBB- Baa3 |
|
Puerto Rico Highways and Transportation Authority (PRHTA) |
Revenue bonds secured by a subordinate gross pledge of gasoline and gas oil and diesel oil taxes, motor vehicle license fees and tolls collected on most existing toll facilities; a first lien on up to $120 million annually of taxes on crude oil, unfinished oil and derivative products (“petroleum products”); and a first lien on tolls from new toll facilities not financed by, or securing, bonds issued pursuant to the Authority’s 1968 Highway Bond Resolution. The proceeds of the gasoline and gas oil and diesel oil taxes, the petroleum products taxes and the motor vehicle license fees are subject to being applied first to the payment of the general obligation debt and debt guaranteed by the Commonwealth. However, such proceeds are to be used for such Commonwealth payments only to the extent that the other available revenues of the Commonwealth are insufficient. As reported in PRHTA’s 2012 audited financial statements, gross revenues covered debt service on the transportation revenue bonds 1.43 times and the combined transportation and subordinate transportation revenue bonds debt service 1.26 times in fiscal year 2012. Assured Guaranty has $0.4 million exposure to the subordinate transportation revenue bonds. Other recent developments: On June 25, 2013, the Governor signed into law certain measures to strengthen the PRHTA’s ability to service its debt, including an increase in the petroleum products tax from $3.00 per barrel to $9.25 per barrel and the transfer of certain cigarette sales tax and vehicle registration revenues to the PRHTA. |
928 |
BBB- BBB Baa3 |
|
Puerto Rico Electric Power Authority (PREPA) |
Revenue bonds secured by and payable from a pledge of net revenues of the electric system. The Authority supplies virtually all electricity consumed in the Commonwealth. As reported in PREPA’s fiscal year 2012 audited financial statements, net revenues, as defined in the Trust Agreement, covered debt service 1.95 times in fiscal year 2012. In PREPA’s Official Statement dated August 15, 2013, unaudited debt service coverage pursuant to the Trust Agreement is reported as 1.38 times for fiscal year 2013. |
860 |
BBB BBB Baa3 |
|
Puerto Rico Municipal Finance Agency (MFA) (Revenue Bonds) |
As a conduit issuer for local governments within the Commonwealth, MFA issues bonds secured by and payable from local government general obligation bonds. The local government general obligation bonds are supported by ad valorem taxes on all taxable property within such local government, and the good faith, credit and unlimited taxing power of each issuing local government are pledged for the payment of its general obligation bonds. In addition, MFA bonds are secured by and payable from moneys on deposit in the reserve accounts established under the applicable indentures. Pursuant to MFA‘s enabling act, the Commonwealth shall replenish amounts required to maintain the reserve accounts for the MFA bonds at the required reserve levels. The payment of such amounts by the Commonwealth is subject to appropriation by the Legislature of the Commonwealth, which appropriation is authorized but not legally required to be made. |
450 |
BBB- BBB- Baa3 |
|
Puerto Rico Aqueduct and Sewer Authority (PRASA) (Water and Sewer Revenue Bonds) |
Revenue bonds secured by a first lien on gross revenues of the system. The Authority is the island’s sole provider of public water and sewer service. Assured Guaranty’s insured bonds are part of a 2008 series for which there is a debt service reserve fund funded at maximum annual debt service. Other recent developments: Customer rates were raised on average by 60% effective July 15, 2013. As reported by Moody’s, gross revenues, after the rate increase, are projected to cover first lien debt service 4.1 times in fiscal year 2014 and 4.4 times in fiscal years 2015 and 2016. |
384 |
BB+ BB+ Ba1 |
|
Puerto Rico Highways and Transportation Authority (PRHTA) |
Revenue bonds secured by a gross pledge of gasoline and gas oil and diesel oil taxes, motor vehicle license fees and tolls collected on most existing toll facilities. Such taxes and motor vehicle license fees are subject to being applied first to the payment of the general obligation debt and debt guaranteed by the Commonwealth. However, such proceeds are to be used for such Commonwealth payments only to the extent that the other available revenues of the Commonwealth are insufficient. As reported in PRHTA’s 2012 audited financial statements, gross revenues covered debt service 2.67 times in fiscal year 2012. |
303 |
BBB BBB+ Baa2 |
|
Puerto Rico Sales Tax Financing Corporation (COFINA) (Sales Tax Revenue Bonds) |
Tax-backed revenue bonds secured by a second lien on certain revenues derived from the 5.5% sales tax. Commonwealth subject-to-appropriation back-up support if revenues are insufficient. Total sales tax revenues covered combined senior and second lien debt service by 1.95 times in fiscal year 2012 as calculated from the fiscal year 2012 Sales Tax Financing Corporation audit and the fiscal year 2012 Commonwealth Comprehensive Annual Financial Report. Pledged sales tax revenues generated combined senior and second lien debt service coverage of 1.01 times in fiscal year 2012. |
267 |
A A+ A3 |
|
Puerto Rico Convention Center District Authority (PRCCDA) |
The bonds are special limited obligations of the Authority, and are secured by a first lien on Pledged Revenues. Pledged Revenues consist primarily of the Authority’s statutory collection of certain hotel tax revenues up to the amount necessary for full payment of principal of and interest on the bonds; Pledged Revenues do not include any other revenues of the Authority, including those derived from operation of the Convention Center. Pursuant to the Constitution of Puerto Rico, the hotel tax revenues are subject to being applied first to the payment of general obligation debt of and debt guaranteed by the Commonwealth. Under the Authority’s enabling act, however, such tax revenues are to be used for such payments only if and to the extent that the other available revenues of the Commonwealth under the Constitution are insufficient. As reported in the fiscal year 2012 Convention Center District Authority audited financial statements, total hotel tax revenue covered debt service 1.98 times. |
185 |
BBB BBB+ Baa3 |
|
Puerto Rico Public Buildings Authority (PBA) |
Supported by a pledge of the rentals of government facilities financed by the bonds and leased by the Authority to departments, agencies, instrumentalities and municipalities of the Commonwealth. The bonds also benefit from a guaranty of the Commonwealth that is supported by a pledge of its good faith, credit and taxing power (as in the case of the Commonwealth’s general obligation bonds). |
139 |
BBB- BBB- Baa3 |
|
Puerto Rico Public Finance Corporation (PFC) |
Supported by annual appropriations to be made by the Legislature of the Commonwealth. The Legislature of Puerto Rico is not legally bound to appropriate funds for the bond payments. |
45 |
BB+ BBB- Ba1 |
|
Government Development Bank for Puerto Rico (GDB) |
General, senior obligations of the Government Development Bank payable from all of its available funds on parity with all of its other general, unsecured and unsubordinated obligations. Further secured by a guaranty under which the Commonwealth pledges to draw from any available Puerto Rico Treasury funds amounts necessary to cover any deficiency. The good faith and credit of the Commonwealth are pledged for such payments. |
33 |
BBB- BBB- Baa3 |
|
Puerto Rico Infrastructure Financing Authority (PRIFA) |
The bonds are payable from and secured by a pledge of federal excise taxes imposed on rum and other articles (currently rum only) produced in Puerto Rico and sold in the U.S. First $117 million of federal excise taxes collected by the U.S. Treasury and returned to the Commonwealth are ultimately deposited into the sinking fund under the trust agreement. If federal excise taxes returned to the Commonwealth in any fiscal year fall below $117 million, the deficiency shall be payable from appropriations that the Legislature of Puerto Rico may, but is not legally required to, make. Pursuant to the Constitution of Puerto Rico, the federal excise taxes are subject to being applied first to the payment of the general obligation debt and debt guaranteed by the Commonwealth. Under the Authority’s enabling act, however, the federal excise taxes are to be used for such Commonwealth payments only to the extent that the other available revenues of the Commonwealth are insufficient. For fiscal year 2012, the Authority reported in its audited financial statements debt service of approximately $112.2 million, which results in coverage of 1.04 times based on the $117 million deposit. |
18 |
BBB- BBB+ Baa3 |
|
University of Puerto Rico (UPR)
|
The University’s obligation to make lease payments relating to the bonds constitutes a general obligation of the University and is secured by a subordinate lien on Pledged Revenues. Pledged Revenues include all proceeds, receipts, profits and other income derived or to be derived by or on behalf of the University, subject to a senior pledge and lien for the benefit of outstanding University System Revenue Bonds. As per the University’s fiscal year 2012 audited financial statements, pledged revenues covered senior debt service 3.39 times and senior and subordinate debt service 3.07 times. |
1 |
BBB- BBB- Ba2 |
Legal Disclosure
The information set out above contains forward-looking statements that reflect the current views of Assured Guaranty Ltd. (together with its subsidiaries, Assured Guaranty) with respect to future events and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties that may cause actual results to differ materially from those set forth in these statements. Readers should also consider the other risk factors contained in Assured Guaranty's filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which are made as of October 11, 2013, and Assured Guaranty undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
In addition, certain of the information set out above has been compiled from third party sources. Assured Guaranty makes no representation that it is accurate, complete or timely, and undertakes no obligation to update or review such information, whether as a result of new information, future developments or otherwise. Assured Guaranty does not perform an audit of the information, and such information may contain untrue statements of material fact or omit material facts necessary in order to make such information not misleading. The information set out above is intended to summarize and describe certain aspects of Assured Guaranty’s Puerto Rico exposures, but is not intended to, and does not, fully set forth or explain all aspects of such exposures or associated risks. This information does not intend to, and does not, replace, fully conform with or include all aspects of the underlying transactional documents and laws and regulations relating to such Puerto Rico exposures. The summaries and descriptions of such exposures and risks are qualified in their entirety by reference to such documents, laws and regulations. You are urged to review such underlying documents, laws and regulations and not to rely on the summaries and descriptions set forth above.