Doral Financial Corp.'s claim for $230 million of tax refunds from the commonwealth of Puerto Rico was recently upheld in a lower court ruling.
Although Standard & Poor's Ratings Services believes Puerto Rico faces many economic and fiscal uncertainties that are reflected in its general obligation bond rating (BB/Negative), currently, the potential award does not change the rating on the commonwealth.
If Puerto Rico loses the case after all appeals are exhausted, the size of the award -- a $45 million per year payout over five years -- would remain relatively small compared with its $9.6 billion current fiscal 2015 budget.
In addition, earlier this year Puerto Rico enacted its Fiscal Sustainability Act (Act 66-2014), which states that all adverse judgments, other than those resulting from eminent domain or court-approved payment plans, shall be budgeted annually taking into consideration the financial condition of the commonwealth and the date the adverse judgment becomes enforceable, and that in no event shall such appropriation exceed $3 million for a given year.
Puerto Rico expects Act 66-2014 to apply in the event of a final adverse judgment in the Doral case, although this may be contested by Doral. Furthermore, it could be a long time before a payout, if there is one, would occur. Puerto Rico intends to appeal the case if necessary to the Puerto Rico Court of Appeals, and then potentially to the Puerto Rico Supreme Court.
Under Standard & Poor's policies, only a Rating Committee can determine a Credit Rating Action (including a Credit Rating change, affirmation or withdrawal, Rating Outlook change, or CreditWatch action). This commentary and its subject matter have not been the subject of Rating Committee action and should not be interpreted as a change to, or affirmation of, a Credit Rating or Rating Outlook.
