Standard & Poor’s downgraded the Puerto Rico Aqueduct and Sewer Authority’s underlying senior-lien bond rating to speculative grade BB-plus from BBB-minus.
S&P also lowered the rating on PRASA bonds guaranteed by the commonwealth by one notch to BBB-minus, the lowest investment grade. The downgrade Tuesday affects about $3.45 billion of revenue bonds and $159 million of guaranteed debt.
Assured Guaranty wraps $384 million of the $3.45 billion of revenue bonds. S&P’s rating change is for the bonds’ underlying rating without this support.
The stand-alone credit profile of the authority is unchanged at BB-plus. After S&P downgraded the commonwealth of Puerto Rico general obligation rating one notch to BBB-minus on March 13 it had to downgrade PRASA’s bonds as well, said credit analyst Theodore Chapman.
Standard & Poor’s has a negative outlook on authority bonds guaranteed by the commonwealth, which parallels its negative outlook on Puerto Rico’s GO debt. It has a stable outlook on the revenue bonds.
The Government Development Bank of Puerto Rico has a history of supporting PRASA’s obligations, Chapman noted.
Given this history and the authority’s key role in providing drinking water and sanitary sewer systems to the island, he believes it highly likely that the agency would get support in case it was financially troubled.
Chapman pointed to three factors to explain the low rating of the authority.
First, PRASA has a relatively fragmented water and wastewater system. As a result of that, and a history of inadequate capital investment, the authority cannot account for 64% of the drinkable water produced, which Chapman considers a very high level.
Second, the authority declined to raise rates for nearly 20 years and has historically had poor billing and collection systems.
Third, PRASA has identified $1.5 billion in needed capital improvements, though as much as $1.2 billion of it may be externally funded. The agency is the sole provider of water and wastewater sewer service on the island.
The authority has made significant strides in the past two years to restore financial operations, Chapman wrote.
In February its board of directors voted to approve a 67% rate increase, effective July 1.
“PRASA’s present course of action, including a rate review and the implementation of other fiscal-efficiency measures, is aimed at returning to fiscal and operational self-sufficiency,” said Government Development Bank president Javier Ferrer. “Taking fiscal-responsibility measures such as the ones the economic team of the García Padilla administration is taking is the right path to save PRASA’s and Puerto Rico’s credit.” Alejandro García Padilla took office as governor in January.
The rate increase will be very good for the authority, Chapman told The Bond Buyer. However, it has a substantial amount of capital spending it needs to do in the near future.
Calculated on a net-revenue basis, PRASA projects debt service coverage of 1.3 times on its senior-lien debt and 1.02 times on all the authority’s obligations. That assumes rate adjustments or government support in the next three fiscal years.
As for positive factors affecting the authority’s debt, the Government Development Bank of Puerto Rico has provided liquidity support through lines of credit, Chapman wrote. Also the authority can increase rates without legislative approval.
PRASA’s unsupported bonds are rated Ba1 by Moody’s Investors Service and BBB by Fitch Ratings. The authority’s guaranteed bonds are rated Baa3 by Moody’s and BBB-minus by Fitch.
