NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'AA-' rating to the Puerto Rico Sales Tax Financing Corporation (COFINA) bonds as follows:
--$996.818 million sales tax revenue bonds, senior series 2011C;
--$81.49 million sales tax revenue bonds, senior series 2011D (local bonds).
The bonds are expected to sell via negotiation on or around Nov. 28, 2011.
In addition, Fitch affirms the 'A+' rating on COFINA's $8.95 billion of outstanding first subordinate sales tax revenue bonds and the 'AA-' on $5.2 billion of outstanding senior lien bonds.
The Rating Outlook for both the senior and subordinate lien bonds is Stable.
KEY RATING DRIVERS
SALES TAX BONDS INSULATED FROM GENERAL OPERATIONS: The ratings on the senior and subordinate lien bonds reflect a structure and revenue pledge that insulates the bonds from the strained general fund operations of the commonwealth. The legal opinions are strong, finding that neither the commonwealth general fund nor commonwealth general obligation (GO) bondholders have a claim on pledged sales tax revenues. Strong non-impairment language provides some additional protection to bondholders.
DIVERSE REVENUE BASE: The sales tax base is broad and the retail environment in Puerto Rico has shown strength even in challenging economic times. The collection rate is weak but improving. Annual debt service coverage by pledged revenues is strong.
REVENUE GROWTH REQUIRED THROUGH LIFE OF BONDS: The final maturity time of both the senior and subordinate lien bonds is very long, and the program's rising debt service profile requires some growth in revenues to achieve coverage of later maturities.
SECURITY
The bonds represent a limited obligation of COFINA, payable from the 1% of the 5.5% sales and use tax, up to a dedicated base amount. COFINA is an independent governmental instrumentality of the commonwealth and affiliate of the Government Development Bank of Puerto Rico (GDB).
CREDIT PROFILE
The bonds are secured by a portion of the commonwealth's island-wide sales and use tax, which became effective on Nov. 15, 2006. This broad-based tax was instituted as part of Puerto Rico's 2006 tax and fiscal reform and its use was restructured in 2009 as part of a comprehensive fiscal and economic package designed to stimulate Puerto Rico's economy and address recurring budget deficits. The tax is currently levied at the rate of 5.5%, with a 1.5% additional municipal option. As originally structured, the commonwealth's general fund received 4.5% of the 5.5% sales tax with the remaining 1% dedicated to debt service on the senior lien bonds, which was used to retire extra-constitutional (i.e. appropriation) debt of the commonwealth. At the time of issuance, the pledge for the senior lien sales tax revenue bonds was the greater of collections from the 1% or a base (minimum) amount payable from all commonwealth sales tax revenues each year. Since debt service in any year is capped at the applicable base amount, debt service on senior lien bonds will be covered by pledged revenues as long as collections from the entire commonwealth sales tax, rather than just the 1%, are sufficient to fund the base amount.
Legislation was passed in early 2009 amending the governing resolution and authorizing COFINA to issue subordinate lien bonds secured by an additional 1.75% of the 5.5% sales tax. The base amount, which was originally $185 million in fiscal 2008, rising 4% per year thereafter, was increased to $550 million, also rising 4% per year thereafter up to a maximum of $1.85 billion. The 'A+' rating on the subordinate lien bonds incorporates coverage by the full 5.5% due to the strong flow of funds. At the start of each fiscal year, revenues from the entire commonwealth sales tax flow directly from Banco Popular de Puerto Rico, the collection agent, to the trustee until revenues deposited with the trustee in that year equal the base amount. Only thereafter does the general fund receive its share of collections.
The sales tax base is broad and diversified, with more than half derived from retail trade. There is minimal reliance on tourism, and automobiles and motor fuel are excluded. Items subject to sales tax include tangible personal property, taxable services, admission fees and bundled transactions. Sales tax collections have been increasing over the past year as the economy slowly begins to emerge from recession and enforcement efforts are increased. Fiscal 2011 revenues increased 2.7% year-over-year and were just 0.6% below estimate. Revenues are projected to increase 22% in fiscal 2012 as enforcement efforts are expanded. Sales tax collections through the first four months of fiscal year 2012 are up 3.4% year-over-year reflecting stabilization of the economy but delays in implementation of the commonwealth-wide point-of-sale electronic system.
Coverage of annual debt service from current revenues is ample; however, debt service escalates fairly rapidly. Sales tax revenues have to grow 0.26% annually to assure 1.0 times (x) coverage of senior lien debt service throughout the life of the bonds and approximately 1.6% annually to assure 1.0x coverage of senior and subordinate lien debt service throughout the life of the bonds by the entire 5.5% tax. Even with escalating debt service and the long final maturity of the bonds, achieving this relatively low level of growth in tax revenues appears reasonable.
The 2009 legislation strengthened non-impairment language, making it more difficult for the commonwealth to eliminate or divert the sales tax in the future. The revised resolution includes language specifying that only the non-pledged portion of the sales tax may be lowered or abolished and only if it is replaced with a 'like or comparable security'. To do so, the trustee must be provided written ratings confirmation and written opinions from the Secretary of Justice, bond counsel, and other experts concluding that the Puerto Rico Supreme Court would agree that the substituted assets/revenues have been validly imposed by law, validly transferred to COFINA, and do not constitute available resources of the commonwealth subject to the clawback provisions for GO debt in the constitution.
The 2011 bonds will refinance appropriation-backed debt issued by the Puerto Rico Public Finance Corporation, reducing the debt service burden on the commonwealth's general fund, and will also fund a termination payment for an associated forward swap agreement. Prior issues have similarly repaid outstanding extra-constitutional debt of the commonwealth, lessening the burden going forward on the general fund, provided deficit funding as part of the commonwealth's fiscal restructuring plan, and supported the commonwealth's efforts to stimulate the local economy.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable criteria and Related Research:
'Tax-Supported Rating Criteria', dated Aug. 15, 2011.
'U.S. State Government Tax-Supported Rating Criteria', dated Aug. 15, 2011.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648898
U.S. State Government Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648897
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