Moody’s declines to improve PRASA’s credit quality
By The Star Staff
Despite a recent bond issue to reduce its debt, the Puerto Rico Aqueduct and Sewer Authority (PRASA) has failed to earn an improved credit quality score from Moody’s Investors Service, which argues that risks, including the water utility’s bankruptcy, continue to remain for creditors.
PRASA’s credit rating remained at Ca with a negative outlook. According to Moody’s, “[o]bligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.”
Last Thursday, PRASA closed on the sale of $1.4 billion in Series 2020 revenue refunding bonds. The Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF by its Spanish initials) estimates the refunding bonds will generate $213 million of net present value savings (15 percent of refunded par) for PRASA, which will use the savings to help fund existing capital or operational needs. PRASA had wanted to guarantee the sale with a lien on net revenues, which entails the payment of operations first before paying debt service, but the change has yet to be implemented.
“The new sale, however, does little to improve the credit quality of PRASA’s outstanding revenue bonds, rated Ca negative,” Moody’s said. “While the successful refunding demonstrates some degree of market access for PRASA, significant credit risks remain for new and existing PRASA creditors. Currently there are no plans to restructure PRASA’s debt, but the new bonds, along with outstanding bonds, are not excluded from a possible future restructuring. A possible future change to the current gross lien pledge, along with significant additional capital needs, are additional challenges.”
The Series 2020 bonds currently refund most of the Series 2008 revenue bonds and all of the commonwealth-guaranteed bonds. The result is an overall decline of revenue debt outstanding and a shift of the previous junior lien commonwealth-guaranteed bonds to a senior lien priority. PRASA has not defaulted on its senior lien revenue bonds and is not part of Puerto Rico’s (Ca negative) ongoing Title III proceedings to date.
“The refunding may pave the way for the authority to issue new money bonds to help fund capital needs for its facilities, which is important as additional capital needs loom large for PRASA. According to the authority’s six-year capital improvement plan for fiscal years 2020-25 (ending June 30), $1.7 billion in investments are necessary to comply with existing consent decrees and improve the condition of existing water and sewer facilities,” Moody’s said. “The consulting engineer’s report from fiscal 2019 notes that all existing assets are either in poor or adequate condition, with a continually high water loss rate. These capital challenges may become increasingly relevant for PRASA creditors if the authority successfully changes the existing gross lien pledge to a net lien pledge.”
Through their purchase of the Series 2020 bonds, purchasers have agreed to change the senior lien revenue pledge from a gross lien to a net lien, where debt service would be paid after operating expenses for the system if all other senior creditors consent to the change in the future, Moody’s said.
PRASA notes that all bonds, including Series 2020 bonds, are not excluded from future debt restructurings.
“PRASA senior bondholders were reportedly in negotiations with AAFAF until the summer of 2018, but the talks did not result in a settlement to restructure debt,” the credit rating agency said. “Debt service on PRASA’s senior lien obligations has been paid on time and in full, but the authority did restructure its federal loans that were originally subordinate to the senior lien revenue obligations. Unlike revenue bondholders of Detroit’s water and sewer department, where parties stipulated to excluding voluntarily tendered water and sewer bonds from ongoing restructuring talks during the city’s 2013 bankruptcy, PRASA creditors may still be put into a formal restructuring process under Titles III or VI of PROMESA [the Puerto Rico Oversight, Management and Economic Stability Act], should the governor deem it prudent and necessary.”
While PRASA has no public plans to pursue a formal restructuring, the recent First U.S. Circuit Court of Appeals ruling in a Puerto Rico’s Highways and Transportation Authority case gives PRASA the option to not pay debt service on special revenue debt during a PROMESA bankruptcy-like proceeding.