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Rating Action:

MOODY'S ASSIGNS Baa2 RATING TO PUERTO RICO AQUEDUCT AND SEWER AUTHORITY'S UP TO $2.15 BILLION OF REVENUE BONDS, SERIES 2012A AND 2012B (SENIOR LIEN) AND AFFIRMS Baa2 ON OUTSTANDING SENIOR DEBT

06 Feb 2012

OUTLOOK IS NEGATIVE

New York, February 06, 2012 -- Moody's Rating

Issue: Revenue Bonds, Series 2012A (Senior Lien); Rating: Baa2; Sale Amount: $2,150,000,000; Expected Sale Date: 2/14/12; Rating Description: Revenue: Government Enterprise

Opinion

Moody's Investors Service has assigned a Baa2 rating to the Puerto Rico Aqueduct and Sewer Authority's (PRASA) up to $2.15 billion in senior lien Revenue Bonds, Series 2012A and 2012B and affirmed the Baa2 rating on $1.38 billion of outstanding senior lien bonds. Proceeds will be used for refinancing various lines of credit extended by the Government Development Bank for Puerto Rico (GDB) and a bond anticipation note that was issued to repay a syndicated loan maturing in January 2012, and funding a Budgetary Reserve Fund to support operations, PRASA's capital improvement program, and capitalized interest until July 1, 2013. The Series 2012A will be sold in the U.S. tax-exempt market. The Series 2012B bonds will be sold in the local Puerto Rico market.

SUMMARY RATING RATIONALE

The Baa2 rating incorporates PRASA's monopoly position as a provider of essential water and sewer services and the experienced senior management team's plans to improve the operational efficiency and effectiveness of the system. It also incorporates the financial weaknesses of the authority, which has consistently relied on subsidies and loans from the commonwealth and the GDB rather than raise rates, and the difficulty PRASA has had reducing the amount of water lost through leaks or for which no payment is received, currently estimated at 63% of total water produced. The rating also reflects the size and complexity of the system, below-average wealth levels in the commonwealth, and an extended economic recession. The negative outlook reflects PRASA's expected continued reliance on GDB and the Commonwealth of Puerto Rico (the "commonwealth") (rated Baa1/Negative) for financial support, as well as the operational challenges PRASA faces to reduce the significant amount of water lost through the system.

STRENGTHS

* Monopoly provider of an essential service in the commonwealth

* Experienced senior management team

* Adequate forecasted debt service coverage ratios

* Ability to adjust rates 4.5% per year (up to a combined 25%) need for certain public hearings

* In compliance with environmental agreements with U.S. EPA and commonwealth DOH

* Fiscal Oversight Agreement with GDB centralizes planning and increases fiscal oversight of PRASA

* Change in senior lien provides bondholders with pledge of gross revenues before operating expenses, but increases debt capacity

CHALLENGES

* Large and complex system

* Lack of rate adjustments in recent years and no current plan to raise rates resulting in weak finances

* Large amount of undetermined water losses

* Reliance on funds from GDB and the commonwealth to cover operations over rate adjustments

* Regulatory requirements have necessitated a large capital improvement program

Outlook

The outlook is negative based on the authority's continued weak finances and operations, the continued reliance on GDB and the commonwealth for financial support, and the significant challenges the authority will face to reduce the amount of lost water.

WHAT COULD MAKE THE RATING GO UP

- Sustained financial self-sufficiency, without assistance from commonwealth

- Improvement in system operations and efficiency

- Demonstrated willingness to implement rate adjustments to maintain financial margins

- Upgrade in commonwealth's G.O. rating

WHAT COULD MAKE THE RATING GO DOWN

- Failure to implement needed rate adjustments in a timely manner

- Decline in coverage

- Downgrade in the commonwealth's G.O. rating

- Failure to address lost water

The principal methodologiies used in this rating was Analytical Framework For Water And Sewer System Ratings published in August, 1999 and Credit Substitution Approach published in August, 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 30 April 2012. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

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.

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Lisa Heller
Vice President - Senior Analyst
Public Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Emily Raimes
Vice President - Senior Analyst
Public Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

MOODY'S ASSIGNS Baa2 RATING TO PUERTO RICO AQUEDUCT AND SEWER AUTHORITY'S UP TO $2.15 BILLION OF REVENUE BONDS, SERIES 2012A AND 2012B (SENIOR LIEN) AND AFFIRMS Baa2 ON OUTSTANDING SENIOR DEBT
No Related Data.
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