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Rating Update:

MOODY'S AFFIRMS RATINGS ON PUERTO RICO HIGHWAY AND TRANSPORTATION AUTHORITY HIGHWAY REVENUE BONDS AND TRANSPORTATION REVENUE BONDS, IN ADVANCE OF CONCESSION AGREEMENT

20 Jul 2011

RATINGS ARE ON WATCHLIST FOR POSSIBLE DOWNGRADE, BASED ON WATCHLIST APPLIED TO COMMONWEALTH GENERAL OBLIGATION BONDS

State
PR

Opinion

NEW YORK, Jul 20, 2011 -- Moody's Investors Service has affirmed the A2 rating on the Puerto Rico Highways and Transportation Authority (PRHTA) Highway Revenue Bonds, and affirmed the A3 rating on the PRHTA Transportation Revenue Bonds, in advance of a concession agreement the PRHTA has announced in which the concessionaire will operate two toll roads in Puerto Rico and collect the toll revenues associated with those roads. The ratings are on review for downgrade at this time, reflecting the watchlist action taken on the commonwealth's general obligation bonds (rated A3 on review for downgrade). A rating action may be taken on the commonwealth in the course of the review, which would also impact the ratings of the bonds of the Puerto Rico Highway and Transportation Authority. While the authority's ratings may be lowered as a result of rating action on the commonwealth, the affirmation at this time reflects the fact that the ratings of the authority will not be lowered or withdrawn solely as a result of the concession agreement.

RATING RATIONALE

The Puerto Rico Public-Private Partnerships Authority (PPPA) has announced an agreement with Autopistas Metropolitanas de Puerto Rico, LLC (the concessionaire) to enter into a 40-year concession agreement wherein the concessionaire will operate two toll roads, PR-22 and PR-5, and have the right to collect the toll revenues associated with these roads. In return, the concessionaire will pay an upfront concession fee of $1.080 billion and has agreed to invest $56 million in the roads over the next three years and an additional $300 million over the life of the contract. The transaction is expected to close on September 22, 2011.

To comply with the resolutions and certain tax guidelines, PRHTA will use a portion of the upfront payment from the concession to defease debt. PRHTA's plan for defeasance targets specific coverage levels after removal of the PR-22 and PR-5 toll revenues from the resolutions. Targeted coverage is a minimum of: 1.5x coverage of MADS for the 1998 Resolution senior lien; 1.3x coverage of MADS for the 1998 Senior and Subordinate liens; 2.0x coverage of MADS for the 1968 Resolution bonds; and 1.15x coverage of MADS for the 1968 Resolution bonds by tolls alone. While coverage of each credit may be higher than the targeted coverage level, it is not expected to be lower. The targeted coverage levels have been determined to be sufficient to allow the bonds to maintain the current rating levels.

CREDIT STRENGTHS

* Gross pledge of large, diverse pledged revenue stream consisting of highway system tolls, motor fuel taxes, vehicle fees, and excise taxes on imported petroleum;

* Significant toll rate increase in 2006, and new tolls in the San Juan metropolitan area; and

* Support of the authority provided by the commonwealth, the legislature, and the Government Development Bank.

CREDIT WEAKNESSES

* Large, complex, and debt-intensive capital program;

* Declines in revenues in 2008-2010; and

* Constitutional prior claim of commonwealth general obligation bonds (currently rated A3) on the authority's tax revenues-but not toll revenues, which are exclusively pledged to the authority's debt service if necessary to pay G.O. debt service.

DETAILED CREDIT DISCUSSION

We have affirmed the following ratings: the A2 rating on the Highway Revenue Bonds (approximately $1.6 billion outstanding); the A3 rating on the Senior Transportation Revenue Bonds (approximately $4.2 billion outstanding); the A3 rating on the Subordinated Transportation Revenue Bonds, Series 1998 (Puerto Rico State Infrastructure Bank) (approximately $70 million outstanding); the Baa1 rating on the Subordinate Transportation Revenue Bonds (approximately $290 million outstanding); and the Baa1 rating on the Special Facility Revenue Bonds (Teodoro Moscoso Bridge) (approximately $150 million outstanding).

SECURITY FOR THE BONDS

The authority issues debt under a 1968 Resolution (the Highway Revenue bonds) and a 1998 Resolution (the Transportation Revenue bonds), which has a senior and a subordinate tranche. The PRHTA revenue bonds are secured by: toll revenues; gasoline taxes and diesel taxes; taxes on petroleum; vehicle license fees; and investment income. The bonds have a gross pledge on the revenues. The authority has the ability to raise tolls when necessary, after public hearings.

The authority's Highway Revenue Bonds are secured by 1968 Resolution revenues. These include: gasoline taxes ($0.16 per gallon, 100% goes to authority); diesel taxes ($0.08 per gallon, 50% goes to the authority); motor vehicle license fees (first $15 per vehicle goes to the authority); and toll revenues from existing roads (22 toll plazas in operation). The tolls provided approximately $190 million of revenues in 2010. Of that, approximately $92 in toll revenues came from the two toll roads (PR-22 and PR-5) that are the subject of the concession agreement. Future toll revenues will therefore be reduced by approximately half.

The Transportation Revenue Bonds are secured by the 1998 Resolution revenues, which include: residual revenues after debt service is paid on the Highway Revenue Bonds (1968 Resolution); petroleum products tax revenues (a tax levied per barrel of petroleum produced in Puerto Rico, based on a sliding scale that reduces tax as price per barrel rises); and new eastern corridor toll revenues (tolls were implemented in mid-2006, and are security for the Transportation Revenue Bonds).

There is an additional bonds test of 1.5 times for the Transportation Senior Revenue Bonds and 1.25 times on the subordinate tranche of the 1998 Resolution. The lien on the Highway Revenue Bonds is closed. There is a debt service reserve fund for the Highway Revenue Bonds and Senior Transportation Revenue Bonds funded at the lesser of MADS or 10% of the issued amount. There is a debt service reserve fund for the Subordinated Transportation Revenue Bonds, Series 1998 (Puerto Rico State Infrastructure Bank) funded at 2.5 times MADS. Further enhancing bondholder protection, the commonwealth covenants not to reduce tolls, taxes, licenses, or fees while they are security for bonds.

CLAWBACK PROVISION AFFECTS PLEDGED REVENUES

Most of the revenues that are pledged to the bonds are subject to the commonwealth's constitutional "clawback" provision, which provides that the revenues are first available to the commonwealth to pay debt service on its general obligation bonds, if needed. Toll revenues, however, are not subject to the clawback provision. The rating on the Highway Revenue Bonds reflects this exemption, and the fact that the Highway Revenue Bonds have debt service coverage provided by toll revenues alone. The rating on the Transportation Revenue Bonds reflects a lack of coverage of debt service solely by toll revenues and the fact that most of the revenues are subject to the clawback.

PLEDGED REVENUES DECLINED IN 2008-2010

The recession and high oil prices together caused a decline in the pledged revenues in fiscal year 2008, which continued in 2009 and 2010. The revenues pledged to the Highway Revenue Bonds declined by 3.4% in 2008, 2.3% in 2009, and 2.7% in 2010. The revenues pledged to the Transportation Revenue Bonds fell by 3.6% in 2008, 2.4% in 2009, and 6.3% in 2010. In 2010, the Highway Revenue Bonds had 2.98x coverage of MADS (compared to the targeted coverage level of 2.0x after the defeasance), the Transportation Revenue Bonds (senior) had 1.6x coverage of MADS (compared to the targeted coverage level of 1.5x after the defeasance), and the senior and subordinate lien had 1.4x coverage of MADS (compared to the targeted coverage level of 1.3x after the defeasance).

Outlook

The ratings are on review for downgrade at this time, reflecting the watchlist action taken on the commonwealth's general obligation bonds (rated A3 on review for downgrade). The Watchlist for possible downgrade reflects the weak funding of the pension plans and the significant strain that future pension funding requirements will likely exert on the Commonwealth's financial position.

What could move the rating--DOWN

* Downgrade of Commonwealth of Puerto Rico's G.O. rating;

* Significant negative variance from authority's revenue projections, leading to lower debt service coverage levels and difficulty covering operating expenses;

* Significantly higher-than-expected future debt issuance, unless associated with significant new revenues.

* Lack of market access.

Ratings were assigned by evaluating factors believed to be relevant to the credit profile of the issuer such as i) the business risk and competitive position of the issuer versus others within its industry or sector, ii) the capital structure and financial risk of the issuer, iii) the projected performance of the issuer over the near to intermediate term, iv) the issuer's history of achieving consistent operating performance and meeting budget or financial plan goals, v) the nature of the dedicated revenue stream pledged to the bonds, vi) the debt service coverage provided by such revenue stream, vii) the legal structure that documents the revenue stream and the source of payment, and viii) and the issuer's management and governance structure related to payment. These attributes were compared against other issuers both within and outside of PRHTA's core peer group and PRHTA's ratings are believed to be comparable to ratings assigned to other issuers of similar credit risk.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Information sources used to prepare the credit rating are the following: parties involved in the ratings and public information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Analysts

Emily Raimes
Analyst
Public Finance Group
Moody's Investors Service

Baye B. Larsen
Backup Analyst
Public Finance Group
Moody's Investors Service

Contacts

Journalists: (212) 553-0376
Research Clients: (212) 553-1653


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MOODY'S AFFIRMS RATINGS ON PUERTO RICO HIGHWAY AND TRANSPORTATION AUTHORITY HIGHWAY REVENUE BONDS AND TRANSPORTATION REVENUE BONDS, IN ADVANCE OF CONCESSION AGREEMENT
No Related Data.
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