Standard & Poor's Ratings Services has lowered its rating on Puerto Rico Highway & Transportation Authority's (PRHTA) grant anticipation revenue (GARVEE) bonds outstanding to 'A' from 'A+'. At the same time, we have placed the rating on CreditWatch with negative implications.
"The downgrade is based on administrative deficiencies that resulted in a failure to make a debt service payment in a timely manner, while the CreditWatch is based on uncertainty regarding PRHTA's plan to avoid future late debt service payments," said Standard & Poor's credit analyst Georgina Rovirosa.
PRHTA and the Federal Highway Administration Authority (FHWA) entered into a memorandum of agreement (MOA) in which the FHWA agreed to reimburse PRHTA for eligible federal-aid highway projects. Following a payment dispute between the U.S. Army Corps of Engineers (USACE) and Puerto Rico on an unrelated matter, the U.S. Treasury withheld a payment related to the MOA that PRHTA expected on March 12, in order to make a debt service payment March 15. Despite a fully funded debt service reserve, the trustee failed to draw from this source, resulting in a missed payment. On March 19 (two business days following due date) the trustee made the approximately $2 million debt service payment in full as due, including $200,000 from the debt service reserve fund, which has since been fully replenished to about $12 million.
Although the U.S. Treasury initially placed and has since removed Puerto Rico from its "offset" list related to the USACE dispute, we understand that PRHTA is in discussions with the trustee to develop a plan to ensure the debt service payment issues do not repeat. We will continue to monitor this plan in order to resolve the CreditWatch.
The bonds are special limited obligations of the authority payable solely from and secured by a first-lien pledge of the trust estate, which primarily consists of federal aid revenues received by the authority or the trustee. Bondholders are additionally secured by a fully debt service reserve funded to the lesser of maximum annual debt service, 10% of par, or 125% average annual debt service. This is the only GARVEE bond issue for PHRTA, of which $86.1 million is outstanding, maturing in 2021.
Standard & Poor's expects to resolve the CreditWatch within the next 90 days, which could include further downgrades.