PREPA double-whammied by credit agency downgrades
The Puerto Rico Electric Power Authority got a double-whammy from stateside credit ratings agencies, which separately downgraded the agency’s credit a day after Gov. García-Padilla announced a bill paving the way for the restructuring of fiscally troubled public corporations.
While Moody’s downgraded the rating on about $8.8 billion of PREPA’s power revenue bonds ratings to “Ba3” from “Ba2,” Fitch Ratings slashed the rating to “CC” from “BB.” All of the classifications are considered “junk” status.
In their summaries, both agencies referred to PREPA’s liquidity issues and the enactment of the “Puerto Rico Public Corporations Debt Enforcement and Recovery Act,” which creates a framework to assist financially stressed public corporations overcome their problems “through an orderly, statutory process” that allows them to handle their debts fairly and equitably, while ensuring the continuity of essential services to citizens and infrastructure upgrades.
Many experts are interpreting the law as a “criollo” bankruptcy proceeding for public corporations facing financial problems, including PREPA, the Aqueduct and Sewer Authority and the Highways and Transportation Authority, which have a combined debt of about $20 billion.
“Among other things, the Relief Act establishes an Energy Commission to oversee PREPA and the electric rates it can charge customers, introducing a further level of oversight that may lead to delays if PREPA needs to raise rates,” Moody’s said, adding the Act “suggests the possibility of a restructuring of some kind.”
“Today’s rating action considers Moody’s concerns about increasingly tight liquidity. Even if PREPA is able to address its immediate liquidity issues, the company faces continuing challenges over the next several years.”
“These challenges include negative free cash flow, very high electricity rates accompanied by high rates of non-payment and growing receivables balances, and perceived constraints on raising revenues to fund a sizeable capital spending program needed to convert electricity generation from high cost oil to lower cost natural gas.”
Immediate liquidity concerns include the near-term maturity of large bank borrowings, which total about $671 million and are due in July and August 2014. The rating action also reflects uncertainty surrounding the Government Development Bank of Puerto Rico’s “willingness and ability to support PREPA’s liquidity, in the event that the lines are not extended,” Moody’s further noted.
Moody’s “Ba3” rating on PREPA is now lower than the “Ba2” rating on the GDB and the Commonwealth’s general obligation bonds as well as other public corporations on the island.
“We believe this differentiation and de-linking is warranted given the limited ability of GDB and the Commonwealth to support PREPA, its significant debt burden, the level of capital spending requirements for the fuel diversification plan and highly constrained liquidity,” Moody’s said “At the ‘Ba3’ ratings level, Moody’s incorporates an expectation of support, although the ability and/or willingness of GDB and the Commonwealth to provide that support may have diminished.”
Meanwhile, Fitch’s downgrade reflected similar concerns as Moody’s, but stressed PREPA’s probable financial restructuring or default in light of the newly proposed legislation in Puerto Rico.
“With market-based options for addressing repayment of the pending maturities diminishing, Fitch believes that PREPA will likely pursue restructuring alternatives offered under the Act. Existing law would not have supported a debtor controlled restructuring process,” it said.
The bill — which is expected to be signed into law by June 30 — contemplates two procedures for addressing debt obligations. While they are intended to restore solvency over the long-term, both procedures entail debt restructuring that would trigger suspension of debt payments and preclude the timely payment of principal and interest during the pendency of the proceedings.
The first is a consensual debt modification procedure whereby the corporation would adopt a recovery program and a market-led solution for debt relief that binds all debt holders with the consent of a supermajority of debt holders. Discussions with stakeholders would be preceded by a suspension period when all remedies would be suspended.
The second procedure would be court-supervised and would culminate in an orderly debt enforcement plan. Qualifying public corporations would be allowed to defer repayment and decrease interest and principal to continue to fulfill vital public functions. Any action for payment of claims would be stayed during the procedure. Ultimately a debt enforcement plan would be proposed by the petitioner or GDB and confirmed by the court and creditors.