GDB ‘expected’ power authority’s credit ratings cut, moving forward on $475M bond issue
Gov. Luis Fortuño administration officials took Moody’s Investors Service’s decision to cut the Puerto Rico Electric Power Authority’s credit rating down a notch in stride Wednesday, saying it was “expected” and would not have an impact on the upcoming $475 million bond emission.
José Otero, executive vice president of financing for the Government Development Bank, told News is my Business the agency was aware that Moody’s would downgrade Prepa’s credit to BAA1 from A3, giving it a stable outlook.
He said a similar decision was expected from Fitch Ratings, which affirmed Wednesday its “BBB+” rating on Prepa’s revenue bonds, but revised its outlook to “Negative” from “Stable.”
“Right now we’re in the midst of a transaction related to Prepa through which we expect to raise $475 million in the stateside exempt market. We’re conducting a roadshow talking to investors in New York and Boston, and don’t foresee this having an impact on that transaction,” said Otero, referring to the bond issue expected to go to market April 9.
The agency will split the proceeds of the bond issue to: cover debt refinancing at a lower interest rate; float Prepa’s five-year capital improvements plan; and repay Prepa’s credit lines with the GDB, he said.
In its analysis, Moody’s listed several reasons for its downgrade, including Prepa’s significant reliance on oil to generate energy, its outstanding account receivables — which represented 26.7 percent of 2011 revenue — and the frequent management changes at the helm of the agency, which could fuel certain instability.
“While they point out the problem of Prepa’s high dependency on petroleum as a source of energy, we’re encouraged by the fact that both agencies placed a lot of emphasis and noted as positive Prepa’s strategic plan to diversify its energy sources to natural gas,” he said, referring to the Fortuño administration’s strong push behind the construction of a natural gas pipeline.
Moody’s also pointed out Prepa’s staggering uncollected accounts balance, a problem that “has historically been a pressure on cash flow, though legislative efforts should reduce impact in future periods.”
Late last year, the governor signed Law 239, which transferred to the Office of Management and Budget the responsibility of calculating the electricity bills for public agencies and coordinate the payment to Prepa through the Treasury Department on a monthly basis. As of December 2011, central government agencies owed Prepa nearly $42 million.
“The plan in place should prospectively lower the central government’s debt with Prepa,” Otero said.
Meanwhile, Fitch mentioned among its key ratings drivers Prepa’s “slimmer operating margins and cash flow in fiscal 2011 due to the effects of ongoing economic recession, escalated fuel costs, declining electricity usage, mounting accounts receivable and the authority’s reluctance to increase electric base rates.”