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Fitch Downgrades Prepa Revenue Bonds to ‘C’

By on June 27, 2016

SAN JUAN – Fitch Ratings has downgraded $8.2 billion of Puerto Rico Electric Power Authority (Prepa) power revenue bonds to ‘C’ from ‘CC’.

In addition, the credit-rating company is assigning an Issuer Default Rating (IDR) of ‘C’ to Prepa “in anticipation of a distressed debt exchange, which will allow Fitch to reflect the potentially different effects of the exchange on outstanding securities,” according to Monday’s announcement.

The bonds remain on Negative Rating Watch. The IDR is placed on Negative Rating Watch.

Prepa headquarters in San Juan (CB photo/Eduardo San Miguel Tió)

Prepa headquarters in San Juan (CB photo/Eduardo San Miguel Tió)

The following was extracted from Fitch’s release:

SECURITY

The power revenue bonds are secured by a senior lien on net revenues of the electric system.

KEY RATING DRIVERS

RESTRUCTURING OR DEFAULT APPEARS INEVITABLE: The downgrade and maintenance of the Negative Watch reflect Fitch’s view that a payment default or restructuring of PREPA’s debt obligations is inevitable. Although existing agreements between PREPA and certain creditors (including bondholders) have provided temporary relief, a key component of PREPA’s restructuring plan is the reduction of existing debt by means of a proposed distressed debt exchange. PREPA is seeking to complete its restructuring by Dec. 31, 2016.

CASH FLOW CONCERNS REMAIN: PREPA’s net cash receipts and existing funds on hand remain insufficient to meet long-term working capital, debt service and other funding requirements. Although debt service payments due July 1, 2016 may be paid, funding for such payments is likely to come from existing bond purchase agreements with existing creditors and new re-lending agreements.

FISCAL 2014 AUDIT RELEASED: PREPA’s most recent audited performance (fiscal year ended June 30, 2014) was weak as Fitch-calculated debt service fell to 0.69x, cash on hand totaled only 24 days and leverage rose to 16.1x (total debt/funds available for debt service). The opinion of PREPA’s auditor (Ernst & Young LLP) also notes that the financial difficulties experienced by the authority raise substantial doubt about its ability to continue as a going concern.

FINANCIAL PERFORMANCE REMAINS WEAK: For the 12 months ended June 30, 2015, PREPA reported unaudited earnings before interest and depreciation of $770 million, but a change in net position of ($320 million). The net loss was larger than PREPA’s budgeted loss of $198 million. Poor performance for the fiscal year was further characterized by declining energy sales (1.6% for the period), declining customers (0.4%), high concentrations of accounts receivable (25% of revenue), high fuel costs (12.3 cents/kWh) and an unwillingness to increase base electric rates.

RATING SENSITIVITIES

NONPAYMENT OR DISTRESSED DEBT EXCHANGE: The Puerto Rico Electric Power Authority’s failure to meet debt service obligations as scheduled or execution of a distressed debt exchange, where creditors are offered securities with diminished structural or economic terms compared with the existing power revenue bonds to avoid a probable payment default, would result in a downgrade of the Issuer Default Rating to ‘RD’ and any affected securities to ‘D’. Securities that continue to perform will have ratings maintained at ‘C’.

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