S&P Global Ratings has lowered its long-term rating to 'CCC' from 'CCC+' on the Puerto Rico Industrial Medical & Higher Education & Environmental Pollution Control Facilities Financial Authority's series 1999 bonds, issued for Iglesia Episcopal Puertorriquena Inc. (IEP). The outlook is negative.
"The lower rating and negative outlook reflects IEP's vulnerable enterprise and financial profile, characterized by very limited liquidity and financial flexibility; a debt profile that includes a large contingent liability due within five years; and a history of volatile operating results--though the
past three fiscal years have been positive," said S&P Global Ratings credit analyst Stephen Infranco. In addition, coverage on the rated series 1999 debt was weak at just 1x, causing a rate covenant violation in fiscal 2015 (minimum debt service coverage ratio is 1.2x). Noncompliance with such covenant may
give the right to bondholders to declare the outstanding balance of approximately $17.8 million as due and payable immediately. Management indicates no communication has been received from bondholders concerning this instance of noncompliance and that IEP has continued paying the outstanding bond balance in accordance with the original repayment schedule.
Management is currently considering obtaining additional financing through a credit facility collateralized with their own funds to present in the open market a potential offer to purchase the outstanding bonds at a discount although no proposal has been offered. S&P Global believes the noncompliance creates additional liquidity risk should the bondholders accelerate the debt payment, which could cause significant financial stress and rating pressure. Combined, these factors are more reflective of the lower rating and negative outlook.
"The negative outlook reflects our assessment of IEP's vulnerable credit profile given the rate covenant violation on the series 1999 debt, and the significant contingent liability on all debt outstanding," added Mr. Infranco. Furthermore, while IEP's operations remain positive, and management is offsetting weaker revenue with cost-containment initiatives, there is a still considerable economic uncertainty and population decline in Puerto Rico, which could weaken IEP's operations over the outlook period.
Given the economic and demographic challenges and potential for margin compression or operating stress, we could lower the rating if financial performance deteriorates or if there is any attempt to accelerate the series 1999 debt due to the rate covenant violation. Furthermore, given the uncertainty surrounding the Puerto Rico economy, including significant budgetary stress, there could be macro-level events that are out of management control, such as delayed payments or non-payment for health care services that could pressure the rating.
We would consider a stable outlook or higher rating if financial performance improves resulting in coverage levels above minimum rate covenant requirements, and is sustained such that there is no need to access the line of credit for cash flow purposes. Furthermore, given the fragile state of the Puerto Rico economy and the high reliance IEP has on governmental reimbursement, we would want to see some resolution or stabilization of the budgetary pressures currently affecting the commonwealth before raising the rating.
