Standard & Poor's Ratings Services said its ratings on Puerto Rico Electric Power Authority (PREPA; CCC/Watch Neg) and Puerto Rico Aqueduct and Sewer Authority (PRASA; senior-lien rating: BB-minus/Negative) are unaffected by a court ruling that the Puerto Rico Public Corporations Debt Enforcement and Recovery Act is unconstitutional.
Standard & Poor's does not believe the Feb. 5 ruling by Judge Francisco A. Besosa of the United States District Court in Puerto Rico, which stated the federal Bankruptcy Code preempts the Act, fundamentally changes the underlying credit challenges facing Puerto Rico's public corporations (such as PREPA and PRASA). These center on the corporations' relative willingness and ability to meet their debt service obligations in light of weak liquidity.
When Governor Alejandro Garcia-Padilla signed the Recovery Act June 28, 2014, the commonwealth's public corporations were given an avenue to restructure their debt without creditor consent. Using the Act to restructure debt might have constituted a default under S&P's criteria.
In its opinion, eliminating this avenue does not relieve the fiscal stress facing the commonwealth and its public corporations. Furthermore, it understands Puerto Rico plans to appeal. With or without the Act, the absence of an overarching solution to liquidity issues and the structural imbalance among its revenues, operating expenses, and debt service commitments remain.
PREPA's inability to successfully negotiate renewal of liquidity facilities needed to purchase oil has compounded its weakened financial position. The negotiating deadline for the revolving credit facilities has been extended to March 31. This extension is part of an agreement with insurers and bondholders controlling more than 60% of the authority's bonds to amend the existing bond documents to provide it with liquidity and time to work with its creditors to develop a restructuring plan. In accordance with the agreement, PREPA hired a chief restructuring officer to develop by March 2 a restructuring plan that is acceptable to at least two-thirds of forbearing bondholders.
Liquidity is the immediate risk. The forbearance agreement requires the authority to provide an initial 13-week cash flow forecast with monthly updates. It also allows the authority to use cash in the construction fund to provide some additional interim liquidity. The bank lines the authority uses to purchase oil are almost fully drawn but are paid down as revenue associated with fuel costs comes in. Although missing credit facility payments is not a default under the revenue bond indenture, it believes PREPA's inability to repay the amounts outstanding will increase the likelihood that it will restructure its debt. It will lower the rating if the authority restructures its debt by extending maturity dates to reduce annual debt service payments, which it would view as a default.
It views the climate surrounding all Puerto Rico obligations as creating adverse business conditions for PRASA. Its 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, PRASA's ability to extend its lines of credit (which expire in March 2015) or convert them to long-term debt is seen as being more difficult. The authority has little discretion in its capital improvement program given the large share of regulator-ordered, date-certain mandates as a share of total projects. The negative outlook on PRASA's bonds reflects the belief there is at least a one-in-three chance that the adverse business conditions could worsen within the two-year outlook horizon, leading to a downgrade.
