The Puerto Rico Aqueduct and Sewer Authority will likely succeed in refunding $1.4 billion of bonds this week despite their risks and the overhanging negative cloud on the island's bankruptcy and other defaulted debts, analysts said.
The authority comes as other Puerto Rico bonds have either been restructured or are going through restructuring in the Puerto Rico Oversight, Management, and Economic Stability Act.
“Investors want yield,” said John Hallacy, founder of John Hallacy Consulting LLC. The deal “will go better than reasonably anticipated.”
PRASA’s existing revenue bonds are rated Ca with a negative outlook by Moody’s Investors Service and CCC by Fitch Ratings. S&P Global Ratings withdrew its rating in August 2018, citing a lack of sufficient information from the authority.
The 2020A revenue refunding bonds are coming to market without a rating.
“The lack of financial disclosure by PRASA is a challenge for analysts,” said John Ceffalio, municipal credit analyst at AllianceBernstein. “The most recent audited financials are from fiscal 2017 and the [Preliminary Official Statement] does not share detailed unaudited financial information. We are concerned that 4.5 years after the passage of PROMESA, we still lack timely audited information.”
The deal’s POS says the authority doesn’t promise continuing disclosure. “The authority is not required to file any continuing disclosure in connection with the 2020 Senior Bonds under an exception provided in Rule 15c-12 under the Exchange Act.”
“Entities with a clear path to success do not sell bonds with no public disclosure requirement,” said Municipal Market Analytics Partner Matt Fabian. “PRASA’s plan requires regular rate hikes, operating efficiencies, and progressive capital repair, all of which are difficult for Puerto Rico governments to execute in normal times. It also depends on no material backsliding in the local economy and no new climate-change-related disasters… .
“That being said, PRASA isn’t a worse credit than lots of other projects that get financed in high yield. It’s just not ready to return to the investment grade, rated, transparent market. And its performance probably doesn’t mean much for the GO or other un-restructured PR credits, as all of those have their own, unique, and formidable problems.”
On Tuesday morning Puerto Rico Fiscal Agency and Financial Advisory Authority spokesman Ivan Caraballo Ortiz said the sale was expected to happen this week. Barclay's Capital is scheduled to price the deal Thursday.
In a presentation to the Puerto Rico Oversight Board on Nov. 20, James Castiglioni, a director at Citigroup and an advisor to the board, said that given the lack of disclosure, the bond would be offered to no more than 35 accredited institutional investors.
He said that the authority would only go ahead with the deal if the refunding savings met 5% and 10% thresholds, respectively, for the senior and subordinate liens.
“PRASA plans to use the annual savings to supplement its capital improvement program or to close financial gaps found in PRASA’s fiscal plan,” Castiglioni said.
He said the bonds, which would be used to refund 2008A and 2008B revenue and revenue refunding bonds, would amortize similarly to the bonds being refunded. The savings in debt service would generally be level over the course of the bonds and there would be no extension in maturity.
The POS said there will be a minimum purchase of $250,000 and that they may only be resold to similar institutional purchasers.
The Oversight Board has the legal right to put the authority in Title III, which is PROMESA’s bond restructuring section. However, “the authority has no current intent to commence a proceeding under Title III of PROMESA.”
Caraballo Ortiz said PRASA is planning to refund the 2008 bonds but not its $1.85 billion of 2012 series A and series B bonds because these aren’t yet callable.
Barclays is the senior manager on the deal and Bank of America Securities is the co-manager.
“We are evaluating the proposed weakening of the security for PRASA’s bondholders” Ceffalio said. “PRASA is planning to shift to a net pledge from a gross pledge, to weaken existing covenants, and further, there is no debt service reserve.”
The authority has managed to continue to pay its debt service on its bonds in the 4.5 years since PROMESA was passed due to several constructive factors as well as defaults or restructurings on several other forms of debt.
In the years leading up to the passage of PROMESA, the authority got the local government to approve water rate increases. It managed to take steps to increase revenues and reduce expenses to perform financially better than its own projections.
Since the passage of PROMESA in summer of 2016, the authority has negotiated reductions in its debt service funding for its federal debt. The authority has said it expected the Commonwealth government to not pay a Puerto Rico Public Finance Corporation note used for the construction of an authority Superaqueduct. The authority made payments for this in fiscal years 2007 to 2011. The authority has not pledged to pay this debt and its nonpayment wasn’t an event of Default under the revenue bonds’ Trust Agreement, the authority said.
With the approval of the Oversight Board, the authority has paid $20.5 million to pay off the $57.5 million it owed to the Debt Recovery Authority of the former Government Development Bank for Puerto Rico. In November the board approved this as a payment in full of the debt.
According to the POS if the proposed bonds were sold, senior debt would have coverage ratios between 1.46 and 1.66 in the upcoming fiscal years through 2025. All obligations would have coverage ratios between 0.99 and 1.01 in the same period.
While the authority has defaulted on some debt outside of its senior revenue bonds and faces tight coverage ratios in the next few years, it is doing better than the Commonwealth’s other authorities. The Oversight Board has made clear it plans to have the Highways and Transportation Authority pay nothing in the next few years for bond debt and perhaps a fraction of a penny on the dollar for it over the long term.
The board is still negotiating a debt deal with holders of the PREPA bonds. However, in its latest public agreement there was 66.5 to 77.5 cents on the dollar for the debt. The board has indicated it wants a less generous deal.
