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$1.4B Refunding Bond Issue ‘Does Little’ to Improve Prasa’s credit, Moody’s Says

By on December 21, 2020

Further Water Utility Debt Restructuring Possible Under Promesa, Credit Rating Agency Notes  

SAN JUAN – Moody’s Investors Service said in a report issued on Monday that while Puerto Rico Aqueduct and Sewer Authority’s (Prasa) issuing of $1.4 billion in Series 2020 revenue refunding bonds earlier this month demonstrates “some degree of market access,” the transaction “does little” to improve the credit quality of the utility’s outstanding debt, which may be subject to further restructuring. 

In an analysis published in its Credit Outlook report, Moody’s stated that Prasa closed on the sale of the revenue refunding bonds on Dec. 17. The credit rating company said that the Puerto Rico Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym) estimates the refunding bonds will generate $213 million of net present value savings (15% of refunded par) for Prasa, which will use the savings to help fund existing capital or operational needs. 

A joint statement issued by Prasa and Aafaf on Dec. 10 had said that the refinancing would generate approximately $350 million in debt service savings over the life of the refunding bonds. Aafaf Executive Director Omar J. Marrero Díaz explained in the press release that “$1.1 billion of PRASA’s 2008 Revenue Bonds Series A and B (Senior Lien) and $284.8 million of 2008 Revenue Refunding Bonds Series A and B (Commonwealth Guaranteed) are being refinanced through the issuance of $1.37 billion in new revenue refunding bonds.” 

Prasa President Doriel Pagán Crespo said in the Dec. 10 joint press release that all-in interest cost, including expenses associated with pricing and selling the new issue, was 4.36%. 

Moody’s said in its analysis issued on Monday that the transaction will lead to “an overall decline of revenue debt outstanding and a shift of the previous junior lien commonwealth-guaranteed bonds to a senior lien priority.” The credit rating agency noted that the Series 2020 bonds currently refund most of the Series 2008 revenue bonds and all of the commonwealth-guaranteed bonds. 

“While the successful refunding demonstrates some degree of market access for Prasa, the new sale does little to improve the credit quality of Prasa’s outstanding revenue bonds and significant credit risks remain for new and existing Prasa creditors,” the credit rating agency said in its report.  

Moody’s maintains Prasa’s credit rating at Ca with a negative outlook. Obligations rated Ca are “highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.” 

While Prasa has no further plans to restructure debt, Moody’s does not rule out “possible future restructuring” of the new bonds as well as the outstanding bonds. 

“A possible future change to the current gross lien pledge, along with significant additional capital needs, are additional challenges,” Moody’s said, adding that the refunding may pave the way for Prasa to issue new money bonds to help fund capital needs for its facilities.  

According to Prasa’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, the credit rating agency noted in its analysis, adding that “the consulting engineer’s report from fiscal 2019 noted 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,” Moody’s explained in its report. “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.” 

While Prasa may not have public plans to pursue a formal restructuring, the credit rating agency noted that a recent First U.S. Circuit Court of Appeals ruling in a Puerto Rico’s Highways and Transportation Authority case gives the island’s water utility the option to not pay debt service on special revenue debt during a bankruptcy-like proceeding under the federal Puerto Rico Oversight, Management and Economic Stability Act (Promesa).  

“Our current ratings for Prasa’s Series 2012 A & B bonds reflect an expectation that in the event of a restructuring, creditors would recover 35% to 65% of outstanding par and accrued interest,” the Moody’s report said. “Unlike revenue bondholders of Detroit’s water and sewage 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 of VI of Promesa, should the governor deem it prudent and necessary.” 

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