Moody's Investors Service said it downgraded the ratings of $8.2 billion of the Puerto Rico Electric Power Authority's (PREPA) power revenue bonds to Baa3 from Baa2.
This rating action concludes the rating review that Moody's started in December 2012. The outlook is negative.
The downgrade reflects the current rating and outlook for the commonwealth of Puerto Rico's general obligation bonds (Baa3; negative) as well as the rating of entities that are based on or capped at the GO rating, including the Government Development Bank of Puerto Rico (GDB) (Baa3; negative), which is an important source of liquidity for PREPA. Moody's believes that the rating of PREPA is closely tied to the rating of the commonwealth.
The rating action also reflects continued weakness in the economy of Puerto Rico, including the lack of economic growth drivers and the negative demographic trends. In addition, the rating action reflects uncertainty about the execution of a long-term fuel diversification and cost reduction plan that is designed to put the authority on a sounder financial footing.
PREPA also has a sizable capital improvement program (CIP), which contemplates the issuance of additional debt and uncertainty remains in terms of PREPA's ability to execute a complex construction program.
Furthermore, the downgrade reflects credit metrics that have remained weak despite some easing in 2012 as well as weak liquidity. Days cash on hand in 2012 was only slightly higher at 17 days, and PREPAs committed bank lines, which are largely drawn, will need to be renewed at the end of this year.
The negative outlook reflects the negative outlook for the commonwealth and the GDB as well as the liquidity pressures at PREPA that will continue.
The negative outlook also considers the uncertainty about the execution of the long-term strategic plan to convert high cost oil-based power generation to lower cost natural gas, which will enable PREPA to control rates and help spur economic growth on the island.
