Moody's Investors Service said it has lowered ratings assigned to bonds issued by two of Puerto Rico's largest public authorities -- the Puerto Rico Aqueduct & Sewer Authority (PRASA) and the Puerto Rico Highway & Transportation Authority (PRHTA).
The rating on PRASA's revenue bonds was downgraded to Ba3 from Ba2. PRHTA's highway revenue bonds (1968 Resolution) were downgraded to Ba3 from Ba1. The transportation revenue bonds (1998 Resolution) were downgraded to Ba3 from Ba2, and the subordinate transportation revenue bonds were downgraded to B1 from Ba3.
The ratings on all remain under review for possible further downgrade. On June 26, the Puerto Rico Electric Power Authority (PREPA) was downgraded to Ba3, on review for further downgrade, from Ba2.
The rating downgrades for both PRHTA and PRASA reflect the commonwealth's declaration of intent -- through legislation -- to allow restructuring of public corporation liabilities, which demonstrates a willingness and ability to repay obligations that is weaker than the commonwealth's full faith and credit.
The governor's proposal of a public corporation liability law (the Puerto Rico Public Corporations Debt Enforcement and Recovery Act) earlier this week signals a rising risk that the commonwealth (GO bonds rated Ba2, negative) is contemplating a strategic restructuring of its public corporation debt. Public corporations (including PRHTA and PRASA) that could restructure debt under the proposed law should no longer carry credit ratings equal to those of the commonwealth's general obligation (GO) debt.
Moody's acknowledges that PRHTA and PRASA have taken steps toward self-sufficiency by raising revenues, and that while their internal liquidity is weak, they do not face immediate liquidity needs that would force them to seek near-term debt restructuring. However, the downgrades further recognize that these entities have longer-term hurdles, including reduced ability to raise new operating revenues or to impose austerity measures, given the island's weak economy and their own high debt burdens. PRASA also faces substantial capital needs for non-discretionary projects to meet environmental mandates.
During its review, Moody's will evaluate the degree to which the new law affects the likelihood of a default through a debt exchange or other restructuring that could result in an economic loss for PRHTA or PRASA's bondholders.
Evidence that the proposed legislation is intended to be used to restructure debt of PRASA or PRHTA probably will push the entities' ratings lower still. Moody's will also focus on the fundamental credit positions of PRHTA and PRASA, including their fiscal 2015 budgets, capital needs and financing plans. Emergence of severe liquidity strains also may drive future downgrades, as would lack of market access for critical capital or liquidity needs.
Additionally, Moody's review will consider the implications of the specific revenue pledges that support each bond series in light of the restructuring law.
