Moody's Investors Service downgraded the Puerto Rico Electric Power Authority to Ba2 from Baa3 late on Friday, placing the territory's public sector atop the ranks of largest speculative grade issuers in U.S. history.
The action affects $8.8 billion. Moody's retains a negative outlook on the rating.
Moody's announced the downgrade in a separate action from its downgrade of Puerto Rico's general obligation, Puerto Rico Sales Tax Corp. (COFINA), and several other bonds on Friday afternoon.
With the addition of PREPA, Moody's has $63.3 billion of Puerto Rico public sector debt at a speculative grade. This may be the largest amount of debt from a United States municipal issuer that a rating agency has given a speculative grade, after adjusting for inflation. In the mid-1970s ratings agencies rated New York City much lower than Puerto Rico is currently rated. Adjusting the city's debt to current dollars, it owed $60.6 billion.
Moody's analyst Richard Donner pointed primarily to three factors in explaining Moody's downgrade of PREPA. First, he noted that the Government Development Bank of Puerto Rico has been an important source of working capital liquidity for PREPA. Since Moody's downgraded the GDB to Ba2 from Baa3 on Friday, PREPA's rating had to be reconsidered.
Second, continued weakness in the economy and a slow decline in the commonwealth's population are negative trends affecting PREPA.
Finally, as of the end of 2013 PREPA had just 11 days of cash on hand, and PREPA's committed bank lines of credit had largely been drawn. Account receivables' average age on a year-over-year basis has also increased, Donner said.
On the plus side, PREPA has a large amount of restricted funds available to satisfy annual debt service and prefund a portion of its capital investment problem. The authority is not expected to need to sell bonds for the next two years.
Moody's negative outlook stems from the negative outlook the ratings agency has on the GDB and the commonwealth and the expectation that tight liquidity at PREPA will continue. "The negative outlook also considers the uncertainty and obstacles and executing the long-term capital investment plan focused on converting oil-based power generation to natural gas in the face of a very challenging economic environment," Donner said.
"We're going to firmly continue taking the necessary measures to address financial stability and carry out our strategic plan," PREPA executive director Juan Alicea Flores stated. "We have designed strategies aimed at maintaining revenue levels and reducing expenses."
In other Puerto Rico news, Puerto Rico Treasury Secretary Melba Acosta Febo announced that the government's preliminary estimate of January net revenues were 5.7% above projections.
The government revised its projections for January through July on Feb. 3. As part of a mid-fiscal year review it altered revenue projections for the different revenue streams and months. It projected that overall revenues would be less by 0.1% over the course of the year. However, its projected a 12.3% or $88 million smaller amount for January.
The January figure was below the figure for January 2013 by 0.16%. January 2013 revenues benefitted from the federal excise tax on rum making a $23 million retroactive payment to the General Fund that did not occur in 2014, Melba Acosta said.
The government gained $663 million in General Fund net revenues in January. Through the first half of the year the General Fund has brought in $4.622 billion in net revenues.
January collections from December sales on the sales and use tax were $129.9 million, the highest monthly total since the sales and use tax started in November 2006. The monthly total was up 4.3% over January 2013. For the first seven months of the year, sales and use tax revenues were up 5.9%.
"There have been encouraging signs that Puerto Rico will rise to the occasion and adapt to the new reality, balancing the demands of bondholders and its economy toward rational outcomes," Municipal Market Advisors managing director Robert Donahue said.
