RATINGS ARE ON WATCHLIST FOR POSSIBLE DOWNGRADE, BASED ON WATCHLIST APPLIED TO COMMONWEALTH GENERAL OBLIGATION BONDS
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will not be lowered or withdrawn solely as a result of the concession agreement.
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
* Gross pledge of large, diverse pledged revenue stream consisting of highway
system tolls, motor fuel taxes, vehicle fees, and excise taxes on imported
* 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.
* 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.
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
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
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
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.
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.
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Public Finance Group
Moody's Investors Service
Baye B. Larsen
Public Finance Group
Moody's Investors Service
Journalists: (212) 553-0376
Research Clients: (212) 553-1653
MOODY'S AFFIRMS RATINGS ON PUERTO RICO HIGHWAY AND TRANSPORTATION AUTHORITY HIGHWAY REVENUE BONDS AND TRANSPORTATION REVENUE BONDS, IN ADVANCE OF CONCESSION AGREEMENT
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