Fitch Ratings downgraded the Puerto Rico Electric Power Authority's power revenue bonds to BB from BB-plus on Wednesday afternoon. The downgrade affects $8.7 billion in debt, according to Fitch. The new rating is on Rating Watch Negative.
Fitch managing director Dennis Pidherny attributed the downgrade primarily to two factors.
First, PREPA's cash on hand is insufficient to repay outstanding short-term loans, Pidherny said. It has outstanding loans of $671 million due in July and August based on a $250 million line of credit and a $550 million line of credit.
PREPA is seeking the extension of the lines but it is unclear if it will succeed, Pidherny said. If it does not succeed, it will likely turn to the Government Development Bank of Puerto Rico for short-term assistance to prevent a PREPA default.
Fitch does not give a separate rating to the GDB but rates the Puerto Rico government BB. It makes sense to lower PREPA to the level of the Puerto Rico government in this circumstance, Pidherny said.
Pidherny also pointed to PREPA's lagging financial performance. In the first 10 months of this fiscal year PREPA had a net loss of $204 million.
The net loss was better than the last fiscal year, which started July 1, 2012, but was worse than budget projection.
Through the first 10 months of the fiscal year energy sales fell by 3.7%.
PREPA is considering a rate increase but its adoption is not certain.
Pidherny also said that PREPA's receivables remain high at $1.5 billion, which is 33% of annualized fiscal 2014 revenues. In other words, many of PREPA's customers are late paying their bills.
For positives, Pidherny said that PREPA has a diverse customer base and was moving towards adding natural gas-based facilities as a means of generating lower cost energy.
Axios Advisors managing partner Triet Nguyen and AllianceBernstein managing partner Joseph Rosenblum said the downgrade would probably not affect the market price of PREPA's bonds. The market already prices the bonds at a lower than BB-plus level, they said.
Nguyen said he thought PREPA was on its way to some sort of B rating.
There will likely be some sort of restructuring for PREPA, Nguyen also said. This might just affect costs like wages and not touch bondholder debt.
However, PREPA's union is threatening to go on strike next week and it might insist that bondholders make sacrifices, Nguyen said.
While there is talk of a rate increase, it may be politically hard for PREPA to get. With the recently passed electricity sector bill, a commission will have to approve any rate increases, Nguyen said.
PREPA officials did not immediately respond to a request for comment.
PREPA is rated Ba2 by Moody's Investors Service and BBB by Standard & Poor's.
