On the heels of its downgrade of Puerto Rico's general obligation debt, Moody's Investors Service has cut the ratings for the U.S. territory's electric power authority and university system.
Moody's this week downgraded the Puerto Rico Electric Power Authority's debt from Baa1 to Baa2. The authority has about $8 billion in outstanding power revenue bonds.
It also downgraded $599 million of Puerto Rico university system debt to speculative grades.
"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 general obligation rating, including the Government Development Bank of Puerto Rico, which is an important source of liquidity for PREPA," wrote Moody's lead analyst Richard Donner.
Moody's has the authority's debt under review for a possible further downgrade.
Among the strengths that Moody's noted for the authority are: it continues to operate as the sole provider of an essential service; it has full rate-setting authority; and it has covenants that require maximum annual debt service be covered at least 1.2 times.
Among the weaknesses that Moody's noted for the authority are: "significant dominance of fuel oil as a percentage of total generation fuel mix has subjected PREPA to price volatility," it has problems with accounts receivables, and it has a higher than median level of debt leverage.
Moody's downgraded the university system's revenue bonds and pledged revenue bonds to Ba1 from Baa2. It downgraded the system's educational facilities revenue bonds, 2000 series A to Ba2 from Baa3. "The rating differential reflects the subordinate pledge and lease structure on the 2000 series A bonds," Moody's wrote.
Moody's actions on the system affected $599 million in debt.
The main reasons for the downgrades were the university system's "high reliance on the commonwealth for operating revenue and its dependence on the Puerto Rico Government Development Bank for operating lines for liquidity," Moody's wrote. "In addition, the university has limited ability to grow revenue, given resistance to raising tuition as well as economic challenges that limit families' ability to pay higher costs."
Furthermore, the university system owns a medical center that had an accumulated deficit of $59 million as of June 30, 2011.
For strengths Moody's noted the system's attraction of a large proportion of the commonwealth's high school graduates. It also noted that debt service coverage improved to 2.2 times in fiscal year 2011 from negative coverage in 2009. Cash flow generation improved to a 9.5% operating cash flow margin in fiscal year 2011 from 4.4% in fiscal year 2010.
Moody's is reviewing the bonds for further downgrades. It is waiting on the results for the university's fiscal year 2012 as well as projections for fiscal year 2013. It is also keeping an eye on the Government Development Bank's ability to sell debt.
Also this week Fitch Ratings issued a statement saying that its BBB-plus rating on Puerto Rico's GO bonds was based on the progress made by the outgoing gubernatorial administration. "Maintenance of the rating will require policy decisions that continue this progress and achieve budget balance and a slowing in the growth of long-term liabilities, including passing significant pension reform."
