Moody's Investors Service said it downgraded the rating of approximately $194 million of secured bonds issued by the Puerto Rico Industrial, Tourist, Educational, Medical, and Environmental Control Facilities Financing Authority on behalf of AES Puerto Rico L.P (AES PR) to Ba2 from Ba1 and revised the outlook to negative.
The rating action is driven by Moody's recent rating downgrade of Puerto Rico Electric Power Authority (PREPA: Ba2, negative) revenue bonds.
AES PR's revenues are entirely dependent upon PREPA which in turn is heavily dependent on the economic health of Puerto Rico. On February 7th, Moody's downgraded the ratings of both these entities to Ba2 with a negative outlook.
The rating actions reflected continued weakness in the economy of Puerto Rico which Moody's expects will weigh heavily on PREPA's ability to meet numerous important initiatives or to improve its weak credit metrics and liquidity position. Although Moody's recognizes the strategic importance of the project to PREPA as a source of fuel diversity and relatively low-cost base-load power coupled with the priority of PREPA's contractual payments to AES PR as an operating expense, ultimately the financial strength of AES PR is dependent upon the financial health of its off-taker and its ability to make timely payments.
AES PR's own operational and financial performance continues to be generally consistent with the rating agency's expectations; however, the amount and timing of payments from PREPA continue to be somewhat erratic, periodically impacting cash flow metrics.
For the twelve months ending November 2013, AES PR calculated a cash based debt service coverage ratio (DSCR) of 1.12x -- this ratio includes the impact of a one-time charge for higher legal expenses and the receipt of a PREPA payment four days after the end of the reporting period. Adding back the delayed payment, the ratio would have been 1.26x; further adding back the one-time charge brings the ratio to approximately 1.31x. For the twelve months ending September 2013 the rating agency calculates a DSCR of about 1.40x. Going forward, on the basis of earned revenue, the agency expects AES PR should be able to demonstrate DSCR's that are above 1.30x; for the twelve months ending November 2014, AES projects a cash based DSCR of about 1.26x.
The negative outlook for AES PR is consistent with the negative outlook for PREPA and reflects the potential for the rating to move downward in the event the Ba2 rating of PREPA was to be downgraded.
Downward pressure on the rating could also develop if the project were to experience prolonged operating difficulties which result in reductions to PREPA's capacity payments or if increases in unrecovered operating and/or capital costs cause debt service coverage ratios to fall below 1.20x for an extended period.
In light of the negative outlook, the rating is not likely to revised upward over the near-to-medium term and is currently upwardly constrained by the Ba2 rating and negative outlook of PREPA. In the event the rating outlook at PREPA stabilized, the outlook for AES PR would also likely be revised to stable. Longer term, upward pressure on the rating could develop if the rating of PREPA were to be revised upward and if the project is able to demonstrate debt service coverage ratios above 1.3x on a sustainable basis.
