The Puerto Rico Aqueduct and Sewer Authority's risk for default has risen along with that of the commonwealth, according to S&P Global Ratings.
The ratings agency dropped the authority's series 2008 and 2012 senior-lien revenue bonds to CC from CCC-minus on Tuesday. CC is the agency's second lowest rating. There are $3.4 billion of these bonds outstanding, according to S&P.
"The downgrade is based on our view that PRASA's role and link with the commonwealth and the commonwealth's financial distress have caused a weakening in PRASA's financial risk profile, as evidenced by its diminished liquidity and large accounts payable that by management's estimates will take more than one fiscal year to fully address," said S&P Global Ratings credit analyst Theodore Chapman.
S&P has a negative outlook on the rating.
In addition to debt issued by PRASA, the Commonwealth of Puerto Rico has issued debt on the authority's behalf. Late last week S&P downgraded all the commonwealth government's debt to D, the agency's lowest rating. Accordingly, the agency dropped this debt that the commonwealth issued for PRASA to D. The commonwealth-guaranteed and supported debt associated with PRASA totals $410 million, according to S&P.
According to Chapman the authority has stated it will not pay this debt. If PRASA does not make payment on the commonwealth's supported debt, it wouldn't be a default on the Master Agreement of Trust governing its 2008 and 2012 series bonds, Chapman stated.
PRASA doesn't currently intend to seek negotiated relief from its debt, according to Chapman and PRASA sources.
At the end of June Puerto Rico's legislature approved a bill to allow the authority to sell its debt in a securitized vehicle. "While such a structured financing could allow PRASA much-needed market access if it does become law, simply the timing on such a transaction does not provide PRASA immediate relief," Chapman said. A possible rate increase wouldn't help much because the revenues would be unlikely to arrive until at least early 2017, he said.
The bill arrived in the office of Gov. Alejandro García Padilla on Tuesday, according to someone in the office. The governor was in Washington, D.C., and hadn't signed it yet as of Tuesday afternoon.
On July 1 PRASA President Alberto Lazar- Castro told The Bond Buyer that the bill included nearly everything the authority was seeking. The bill limits the authority to selling no more than $900 million in new money debt over the next few years. However, the authority can also sell refunding bonds.
The bill indicates that the authority isn't to raise its rates in the current and next fiscal years. However, the bill may have an escape hatch to this provision, Lazar- Castro said.
PRASA's senior bonds are rated CC with a negative watch by Fitch Ratings and Caa3 with a developing outlook by Moody's Investors Service.
PRASA declined to comment for this story.
