Moody's Investors Service put the bond ratings of the Puerto Rico Electric Power Authority and the University of Puerto Rico on a review for a downgrade.
Moody's took the action with the university on Thursday night and followed with the action on PREPA on Friday afternoon. Both actions follow a little more than a week after it put all the other Puerto Rico government issuers it rates on downgrade review.
PREPA's power revenue bonds are rated Baa3 by Moody's, BBB by Standard & Poor's and BBB-minus by Fitch Ratings. Any Moody's downgrade would reduce PREPA debt to a speculative grade.
Moody's already rates the University of Puerto Rico's system revenue bonds at speculative-grade Ba1 and its educational facilities revenue bonds Ba2. The university's debt is issued through the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (known as AFICA in Puerto Rico).
Moody's downgrade review affects $8.5 billion of PREPA bonds and $562 million in university bonds.
Moody's analyst Richard Donner said PREPA's rating was closely connected to that of the commonwealth and the Government Development Bank of Puerto Rico that were both put on downgrade review recently.
"The rating action also reflects continued weakness in the economy of Puerto Rico, including the lack of economic growth drivers and the negative demographic trends. In addition, the review for downgrade reflects credit metrics that have remained weak as well as weak liquidity," he wrote.
Analyst Diane Viacava pointed to the university's dependence on the commonwealth government for funding and reliance on the GDB for liquidity.
Viacava also noted that the university's liquidity is weak. The island's struggling economy and challenging demographics could impact tuition. The university is highly reliant on Pell Grants, which are vulnerable to federal budget cuts.
Moody's generally completes its reviews within 90 days.
GDB Interim President José V. Pagán Beauchamp responded to the Moody's action by saying, "we are confident that our comprehensive economic plan to secure Puerto Rico's financial health will succeed in the long term and strengthen the credit profiles of the commonwealth and commonwealth-linked entities. We are committed to the execution of PREPA's fuel diversification and cost reduction strategy, previously cited by Moody's as a key factor in stabilizing its credit . Moody's has cited several of the authority's strengths, including that it continues to operate as the dominant provider of an essential service, its historical independence from the commonwealth's finances, the Board's full rate-setting authority and ability to automatically pass through higher fuel and energy costs to customers, sound bond covenants, and its diverse customer base."
"With regard to the University of Puerto Rico, we note that Moody's has acknowledged its very strong market position as the only public higher education institution in Puerto Rico," Pagán Beauchamp
said. "Moody's also highlighted that all university debt is fixed rate and amortizing, that there are no immediate plans to issue debt, and that in November 2013, the National Science Foundation lifted its suspension of research funding at the central administration and Mayagez campus."
