Standard & Poor's Ratings Services maintained its 'CC' long-term and underlying ratings (SPURs) on Puerto Rico Electric Power Authority's (PREPA) electric revenue bonds. However, the ratings remain on CreditWatch, where they were originally placed with negative implications on June 18, 2014.
As of June 30, 2015, PREPA had about $8.44 billion of long-term debt outstanding, and an additional $730 million due to noteholders.
We lowered our ratings on PREPA's debt to 'CC' on July 2, 2015, following the announcement that the utility would seek to restructure its debt outstanding. As per our criteria, we rate at 'CC' debt issued by "an entity that has announced its intention to undertake an exchange offer or similar restructuring that we classify as distressed, but has not yet completed the transaction" (see "Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings," published Oct. 1, 2012; and "Rating Implications Of Exchange Offers And Similar Restructurings," published May 12, 2009, on RatingsDirect).
In September 2015, PREPA and an ad hoc group of investors, representing more than 60% of forbearing bondholders, reached an agreement for PREPA to restructure its debt. The agreement calls for PREPA to pay 85% of its existing bond obligations. We understand that bondholders will have the option to receive securitization bonds in lieu of cash payments that will pay cash interest at a rate of 4.00%-4.75% for the first five years, depending on the rating obtained, or convertible capital appreciation securitization bonds that will accrete interest at a rate of 4.5%-5.5% for the first five years. No principal payments would be due on either of the bonds in the first five years. According to PREPA, the announced restructuring agreement is expected to "reduce PREPA's total debt principal by approximately $670 million, save more than $700 million in principal and interest payments over the next five years, and substantially reduce PREPA's interest rate expense on the exchanged bond debt." PREPA would use the savings from this restructuring to invest in further conversion of generation assets from high-priced oil to lower-priced natural gas, to meet environmental compliance mandates, and to enhance liquidity. Under our criteria, PREPA would be in default if and when a restructuring is consummated, and we would then lower our rating on the debt outstanding to 'D'. As such, the current 'CC' rating considers our expectation that PREPA will restructure its obligations, and it does not incorporate an assessment of a securitized transation, or PREPA's potential credit quality post-restructuring. In addition, given our significant and immediate concern regarding PREPA's insufficient coverage of debt service and lack of liquidity, the current rating gives no weight to the reforms and goals proposed under PREPA's recovery plan.
