Standard & Poor's Ratings Services said it has lowered its ratings on Puerto Rico Aqueduct & Sewer Authority's (PRASA) revenue bonds, guaranteed by the Commonwealth of Puerto Rico, by three notches to B from BB.
At the same time, Standard & Poor's lowered its rating on PRASA's revenue bonds to B from BB-minus.
The outlook is negative.
"The actions reflect our downgrade of the commonwealth's general obligation debt," said Standard & Poor's credit analyst James Breeding.
The negative outlook affects PRASA's series 2008A and 2008B revenue bonds, of which $285 million are outstanding. The authority also has approximately $874.3 million in other commonwealth-backed obligations, mainly U.S. Department of Agriculture's Rural Development loans, as well as the Puerto Rico Infrastructure Financing Authority loans (not rated). Those bonds are first secured by a pledge of net revenues of PRASA's system. Should the net revenues be insufficient, the commonwealth backstops the bonds.
The B rating on the senior-lien revenue bonds -- series 2008 and 2012A and B, secured by a gross revenue pledge of the authority, with about $3.4 billion total outstanding -- reflects PRASA's stand-alone credit profile (SACP). The authority is a government-sponsored enterprise. By applying government-related entity criteria, and because of PRASA's important role and strong link with the commonwealth, a further downgrade to Puerto Rico's GO debt could cause a downgrade to the authority's revenue bonds.
It also lowered PRASA's SACP to b from bb-minus. The SACP reflects the authority's general creditworthiness based solely on its own fundamentals, absent any uplift or headwinds associated with its relationship with the general government. The lower SACP reflects the current climate surrounding all Puerto Rico obligations as creating adverse business conditions for PRASA.
The authority's liquidity has no immediate challenges because of a 2012 bond restructuring that included the injection of temporary working capital, as well as a 60% rate increase in 2013. However, the authority's ability to extend its lines of credit (LOCs; expiring in March 2015) or convert them to long-term debt is now seen as being more difficult, though PSASA has indicated the intent to proceed with a sizable bond issue within the next two-to-three months.
PRASA has little discretion in its capital improvement program given the large share of regulator-ordered, date-certain mandates as a share of total projects. Although an SACP does not carry an outlook, the outlook on the revenue bonds is negative because there is at least a one-in-three chance that the adverse business conditions could worsen for the authority within the two-year outlook horizon.
The negative outlook on the commonwealth-backed bond reflects Standard & Poor's outlook on Puerto Rico's GO debt. The negative outlook on PRASA's gross-lien revenue bond reflects the fact that current climate surrounding all commonwealth obligations is furthering the adverse business conditions in which PRASA is operating.
