The proposed recovery plan agreed to by the Puerto Rico Electric Power Authority (PREPA) and certain bondholders, announced Wednesday, furthers the view that a restructuring of the issuer's debt obligations remains probable, Fitch Ratings said.
The prevailing forbearance agreements between PREPA and some creditors have provided it with temporary relief. However the proposed plan, if executed, would confirm the concerns the rating agency raised in June 2014 that bondholders will not receive the payment of interest and principal as originally scheduled.
It remains to be seen whether the plan will address longer-term rating concerns about PREPA's net cash receipts and operational challenges. Despite the reduction in debt service as a result of lower outstanding debt and a decline in interest rate, the authority is likely to remain challenged by the weak service territory, declining energy sales, poor revenue collections and lack of fuel diversity over the near term.
For the twelve months ended June 30, 2015, PREPA reported unaudited earnings before interest and depreciation of $770 million and a net loss of $320 million. Poor performance for the period was characterized by declining energy sales (1.5%), declining customers (0.4%), high concentrations of accounts receivable (25% of revenue), high fuel costs (11 cents/kWh) and an unwillingness to increase base electric rates. Fitch-calculated debt-service for the fiscal 2015 was again below 1.0x at 0.87x.
Fitch downgraded the rating on PREPA's net revenue bonds to CC from BB on June 26, 2014 to reflect its view of a probable restructuring following introduction of the Puerto Rico Public Corporation Debt Enforcement and Recovery Act. The rating is on Rating Watch Negative. Any restructuring that does not result in full and timely payment of the power revenue bonds according to the original terms promised would likely result in a further downgrade to C upon agreement by the required holders.
