Puerto Rico utility bonds get a boost from Fitch

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Puerto Rico Aqueduct and Sewer Authority bonds got a rating boost from Fitch Ratings even amid indications that the utility is discussing restructuring its debt.

Fitch raised the rating on PRASA senior lien revenue bonds to CC from C. The move affected $285 million of the bonds guaranteed by Puerto Rico and $3.1 billion without that guarantee.

The upgrade stemmed in part from the July restructuring of the authority’s federal state revolving fund loan and Rural Development, Rural Utilities Service program bonds. Combined with other planned initiatives these “will help to reduce a $241 million gap over fiscal [years] 2019-2024,” Fitch Managing Director Douglass Scott said.

Scott said the new rating also reflected an increase in the authority’s cash balances over the past two years. As of the end of September the balance was $742 million, more than double that of November 2017.

As a note of caution, Scott said the latest released audit for the fiscal year that ended June 30, 2017, had shown debt service coverage 1.1 times debt service based on net revenues, which he described as “minimal.”
The auditor expressed concern about the authority’s ability to continue as a going concern. The audit didn’t factor the federal debt restructuring into this statement.

Scott said other negative factors in the bonds’ rating include the authority’s high levels of unbilled water, elevated exposure to extreme weather events, "high" rates, and a delay in releasing audited financial information. Scott also mentioned the authority’s relationship with Puerto Rico’s central government as a negative.

“Execution of proposed structural changes that eliminate forecasted deficits while continuing to pay senior lien and series 2008A and 2008B revenue refunding bonds according to their stated terms will be critical to rating improvements,” Scott said.

In October 2017 the authority announced on the Electronic Municipal Marketplace Access web site that it was engaged in negotiations with bondholders.

The Puerto Rico Oversight Board’s June-approved PRASA fiscal plan said that “debt service relief” would address at least some of the authority’s financial needs through fiscal year 2024. It is unclear if the cut in debt service for the federal debts, negotiated the following month, will be adequate to address this.

Moody’s Investors Service rates the bonds Ca. A June 2018 paper indicated that Moody’s expects the authority to default on the bonds, with recoveries in the range of 35% to 65%.

S&P Global Ratings doesn’t rate the bonds, saying the authority and Puerto Rico’s government hasn’t been releasing enough up-to-date information about the bonds. On Nov. 19 S&P Senior Director David Bodek said the secret negotiations concerning the bonds made it impossible for the authority to rate them.

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