S&P, Fitch re-aim at PREPA, Puerto Rico’s GO bonds
Standard & Poor’s Ratings Services on Wednesday announced it has lowered its rating on Puerto Rico Electric Power Authority’s power revenue bonds four notches to “B-“ from “BB,” further deepening the agency’s credit woes.
Meanwhile, Fitch Ratings also slashed the ratings of several Commonwealth bonds totaling a combined $37 billion.
In its rationale, S&P attributed its decision to again slash PREPA’s credit rating to its “view of PREPA’s inability to successfully negotiate renewal of a liquidity facility it used to purchase oil,” said Credit Analyst Judith Waite.
The rating remains on CreditWatch with negative implications, where S&P originally placed it June 18, 2014.
“We believe this increases the risk that the authority will attempt to restructure long-term debt, as a law passed in June allows,” she said, referring to the Puerto Rico Public Corporations Debt Enforcement and Recovery Act.
The negotiating deadline for the revolving credit that matured in January has been extended to July 31, but if the facility is not renewed, PREPA will have to repay the $146 million outstanding.
“If a second revolving credit facility, which matures Aug. 14, 2014, is similarly not renewed, the authority will have to repay the $525 million outstanding. Normally, it repays the lines with revenue associated with fuel costs recovered from customers,” she further noted.
“Because PREPA does not have surplus liquidity to repay the amounts, the utility might consider using an option under the new law, which allows public corporations, among other things, to adjust their debts in the interest of all creditors affected thereby; provides procedures for the orderly enforcement and, if necessary, the restructuring of debt in a manner consistent with the Commonwealth Constitution and the U.S. Constitution; and maximizes returns to all stakeholders by providing them going concern value based on each obligor’s capacity to pay.
“PREPA has $8.6 billion of power revenue bonds outstanding. A pledge of the electric system’s net revenues secures the bonds. We lowered the rating and placed it on CreditWatch negative in response to PREPA’s representation that the Government Development Bank would not provide interim liquidity if the authority does not renew its two liquidity facilities,” she said.
“We lowered the rating again when the legislation passed. The CreditWatch placement is pending the outcome of PREPA’s negotiations with the banks. We expect to resolve the CreditWatch within the next three months,” Waite said.
On Monday, PREPA announced it had reached an agreement with its lenders, buying some time to pay its obligations.
Fitch tackles GO debt
In a separate report released Wednesday, Fitch released a list of bonds it had downgraded, as follows:
- $13.4 billion Commonwealth of Puerto Rico GO bonds to ‘BB-‘ from ‘BB’;
- $6.7 billion Puerto Rico Sales Tax Financing Corporation (COFINA) senior lien sales tax revenue bonds to ‘BB-‘ from ‘AA-‘;
- $8.5 billion COFINA first subordinate lien sales tax revenue bonds to ‘BB-‘ from ‘A+’;
- $2.9 billion Employees Retirement System of the Commonwealth of Puerto Rico (ERS) pension funding bonds to ‘BB-‘ from ‘BB’;
- $3.4 billion Puerto Rico Aqueduct and Sewer Authority (PRASA) revenue bonds, series A, B, 2012A and 2012B (senior lien) to ‘B+’ from ‘BB+’;
- $658 million PRASA Commonwealth guaranty revenue bonds to ‘BB-‘ from ‘BB’;
- $1.4 billion Puerto Rico Public Building Authority government facilities revenue bonds guaranteed by the Commonwealth to ‘BB-‘ from ‘BB’.
The agency also cited the passage of the Act as a reason for its downgrade of PRASA and PREPA’s credit ratings.
“The Commonwealth has repeatedly demonstrated its focus on bolstering the fundamentals of its general credit, including through continued progress in closing the general fund budget deficit and limiting exposure to public corporation shortfalls,” Fitch said.
“However, the one-notch rating downgrade reflects marginal deterioration in credit fundamentals despite these efforts, with continued economic weakness, revenue underperformance, and challenges to fiscal stabilization efforts, including reform of the teachers’ pension system,” it added.
While the passage of the Act “does not have a direct negative effect on the GO credit, Fitch will closely monitor how passage of the Act affects future market access and commitment to bondholders.”
Meanwhile, it confirmed it lowered its rating on the COFINA bonds to the level of the Commonwealth’s general credit, although they too are exempt from the law.
“Although COFINA bonds are specifically excluded… the passage of the Act has substantially increased Fitch’s assessment of the risk that the Commonwealth may take steps to the detriment of COFINA bondholders if the Commonwealth considered that a fiscal emergency and its need to provide essential services required legislative action limiting revenues available to COFINA,” it said.
“Such an action would clearly be subject to challenge by bondholders on grounds of unconstitutional impairment of contract similar to the action currently being pursued by bondholders challenging the Act. While bondholders could ultimately prevail on such claims, a default in payment would precede any such outcome,” Fitch noted.
Upon learning of the latest round of credit cuts, GDB Chairman David Chafey and Treasury Secretary Melba Acosta-Febo released a joint statement expressing the government’s “disappointment.”
“We are disappointed by Fitch’s erroneous interpretation that the recent passage of the Recovery Act suggests Puerto Rico may take actions in the future to the detriment of the COFINA credit,” the public officials said.
“As Fitch has acknowledged, COFINA is explicitly insulated from the Recovery Act, which was created to provide a clear legislative framework that allows certain public corporations to address their financial difficulties without compromising the essential services these corporations provide,” they said.
“Fitch recognizes that COFINA’s debt service coverage by pledged revenues is considerable, sales and use tax collections have remained resilient since its implementation in 2006, and total sales and use tax revenues are up 6.5 percent year-over-year through May 2014. Moreover, COFINA retains the senior claim on pledged SUT revenues to fully fund its annual debt service,” they stated.