The chain of rating downgrades affecting Puerto Rico’s credit added yet another link Monday, when Moody’s Investors Service cut the rating on approximately $8.0 billion of outstanding power revenue bonds held by Puerto Rico Electric Power Authority’s to Baa2 from Baa1.
Furthermore, the rating remains under review for possible further downgrade, Moody’s said.
“Today’s action is based on the recent downgrade of the Commonwealth of Puerto Rico’s general obligation rating to Baa3 with a negative outlook as well as the downgrade of entities that are based on or capped at the GO rating, including the Government Development Bank of Puerto Rico, which is an important source of liquidity for PREPA,” Moody’s said in its rationale.
“Our review will focus, among other things, on how closely the rating of PREPA should track the rating of the Commonwealth of Puerto Rico,” Moody’s said, noting PREPA’s rating has not yet fallen below that of the Commonwealth.
Moody’s review will consider several aspects: the sources of PREPA’s liquidity given the recent downgrade of the GDB; an analysis of the audited financial information for fiscal year 2012; the plans of the incoming management team to implement recommended cost cutting measures; and the recent abandonment of the Via Verde gas pipeline and its effect on the authority’s natural gas conversion plan.
Moody’s said PREPA is vulnerable to price volatility as a result of its significant dependence on fuel oil to generate power, an accounts receivable problem that has historically been a pressure on cash flow, debt leverage that is above median for major public power utilities that own generation, and weak internal financial liquidity.
The cut to PREPA’s credit ratings came on the heels of downgrade by Moody’s on Monday that affecting $600 million worth of University of Puerto Rico revenue bonds. The cut to Ba1 from Baa2 relegated the bonds to below investment grade.