Standard & Poor's Ratings Services said it has lowered its rating on Puerto Rico Electric Power Authority's (PREPA) power revenue bonds to BBB-minus from BBB and placed the rating on CreditWatch with negative implications.
"The rating action reflects our view of the risk that the Government Development Bank will not provide interim liquidity if PREPA does not renew its lines of credit, which it uses to purchase oil for the utility's generating plants," said Standard & Poor's credit analyst Judith Waite.
PREPA has $8.6 billion of power revenue bonds outstanding. A pledge of the electric system net revenues secures the bonds.
A $250 million line of credit from Citibank N.A. matured Jan. 10, 2014, but PREPA and Citibank continue to negotiate terms for an extension. According to the authority, the bank intends to reduce the line to $150 million and, before extending the maturity, expects to see PREPA's long-term plan. The foundation for that long-term plan is the authority's proposal for a balanced budget, which must be completed by June 30. A base-rate increase, in combination with operating cost reductions, is one alternative. PREPA, the Government Development Bank (GDB), and the government are reviewing these alternatives.
Under the terms of Citibank's line of credit, PREPA will begin repaying the $146 million outstanding with $10 million July 3, $10 million in mid-August, and the rest in between those dates. The authority does not currently have the cash to pay the full amount.
PREPA also has $525 million outstanding under the $550 million line of credit from ScotiaBank de Puerto Rico, which matures Aug. 14, 2014, unless renewed. The authority has said that ScotiaBank is also expects to see PREPA's long-term plan before agreeing to renew the line.
Nonpayment of borrowings under the lines of credit is not a default under the revenue bond indenture. However, if PREPA can't purchase oil, it can't run its plants. If the authority cannot renew the lines and cannot procure supplemental liquidity -- either from other banks or from the GDB -- the rating agency will lower the rating to reflect the lack of necessary liquidity. The rating has always taken into account the fact that PREPA's high rates, due to the high cost of oil, preclude their ability to build up a strong level of liquidity, obliging them to rely on either the GDB or outside lenders to fund oil purchases.
The rating also incorporates S&P's view of the support provided by a $100 million line of credit from GDB, which is sufficient to cover potential liquidity requirements associated with PREPA's swaps.
The CreditWatch placement is pending the outcome of PREPA's negotiations with the banks. The rating agency expects to resolve the CreditWatch within the next few weeks.
