Fitch Ratings said it has downgraded the following Puerto Rico Aqueduct and Sewer Authority (PRASA or the authority) bonds to C from CC:
Approximately $3.3 billion in outstanding senior lien revenue bonds series A, B, 2012A and 2012B;
Approximately $285 million in outstanding revenue refunding bonds series 2008A and 2008B (guaranteed by the Commonwealth of Puerto Rico).
All bonds remain on negative watch.
The senior bonds are secured by a gross lien of all authority revenues related to PRASA's combined water and sewer system (the system), as defined in the amended master agreement of trust (the MAT), senior to all other debt or expenses of PRASA. The series 2008A and 2008B bonds are payable from system revenues subordinate to all PRASA obligations except commonwealth of Puerto Rico (the commonwealth) supported obligations and obligations payable from surplus revenues. The series 2008A and 2008B revenue refunding bonds are further secured by a guaranty of the commonwealth. Currently, no credit is given for the commonwealth guaranty.
The downgrade to C from CC reflects Fitch's view that a restructuring of PRASA's debt appears imminent or inevitable based on an April 28, resolution by the Puerto Rico Oversight, Management, and Economic Stability Act Financial Oversight and Management Board approving and certifying PRASA's latest proposed fiscal plan.
The fiscal plan contemplates the need to reduce debt service costs for fiscal years 2017-2026 by around 35% to 41% to avoid sizeable annual cash flow shortfalls and/or significant additional rate adjustments.
PRASA's net cash receipts and existing funds on hand remain insufficient to meet long-term working capital, debt service and other funding requirements. PRASA's financial estimates for fiscal years 2017-2026 indicate annual revenue shortfalls of between $29 million to $316 million.
PRASA's most recent audited performance (fiscal year ended June 30, 2016) points to a 6% reduction in operating revenues from the prior year (excluding $90 million transferred from the rate stabilization fund) due in part to severe drought conditions. The lower revenues were somewhat offset by a 3% reduction in operating expenses, although coverage of all obligations was a minimal 1.07x. Days cash improved slightly for the year but remained modest at 62 days.
PRASA's auditor (Kevane Grant Thornton LLP) also noted that financial difficulties experienced by the authority raise substantial doubt about its ability to continue as a going concern.
