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Rating Action:

Moody's assigns Caa3 to Puerto Rico Aqueduct & Sewer's $750M issue; outlook negative

14 Aug 2015

PRASA has long-term parity debt totaling $3.4B

New York, August 14, 2015 --

Moody's Rating

Issue: Revenue Bonds Series 2015A (Senior Lien); Rating: Caa3; Sale Amount: $750,000,000; Expected Sale Date: 8/18/2015; Rating Description: Revenue: Government Enterprise

OPINION

Moody's Investors Service has assigned a Caa3 to the Puerto Rico Aqueduct and Sewer Authority's (PRASA's) planned issuance of as much as $750 million of Series 2015A senior lien revenue bonds. The outlook for the new bonds and approximately $3.4 billion of parity debt is negative.

SUMMARY RATING RATIONALE

The rating incorporates exposure to intense fiscal, debt and economic pressures on the Commonwealth of Puerto Rico (Caa3, negative), a factor that outweighs strengths such as PRASA's role as the sole provider of water and sewer service on the island, and its adequate coverage of debt service by pledged revenues. On August 1, the central government's dwindling liquidity and tenuous market access culminated in a missed payment (which Moody's classifies as a default) on subject-to-appropriation bonds issued by the Public Finance Corporation bonds (Ca, negative). Puerto Rico's intention to embark on a broad debt restructuring has implications even for bonds with comparatively strong legal protections, we believe. However, the Government Development Bank for Puerto Rico (GDB), the government's fiscal agent, "currently does not contemplate" involving PRASA debt in the restructuring, according to an August 11 GDB statement. A working group appointed by Puerto Rico's governor faces an August 30 deadline to devise a "fiscal adjustment plan" that would include reforms as well as debt restructuring.

OUTLOOK

PRASA's outlook is negative, reflecting expectations that the commonwealth will pursue a consolidated restructuring of its debt. While PRASA revenues have increased substantially since a 2013 rate hike, exposure to the central government's financial, economic and political risks indicates a heightened loss potential.

WHAT COULD MAKE THE RATING GO UP

• Restoration of central government liquidity and progress toward structural balance and market access

• Evidence that a Puerto Rico debt restructuring would not affect PRASA bondholders

WHAT COULD MAKE THE RATING GO DOWN

• Declaration of a public debt moratorium by elected officials

• Efforts to restructure PRASA's bonds resulting in lower expected recovery rates

OBLIGOR PROFILE

PRASA, the sole provider of water and wastewater services on the island of Puerto Rico, was created in 1945. For many years, it received regular subsidies from the central government or the Government Development Bank for Puerto Rico (Ca, negative). PRASA provides water to 97% of Puerto Rico residents and commercial enterprises, and it provides sewer service to 59% of residents. It has a nine-member board of directors, most of whom are appointed by the governor of Puerto Rico. Five of the directors are private citizens, and the rest are ex-officio. While the authority can raise its rates without legislative action, increases of more than 4.5% per year require a public hearing process than can take 60 to 90 days. The authority is subject to regulatory compliance mandates from both the US Environmental Protection Agency and the commonwealth's Department of Health. In addition, the authority has struggled with water losses, resulting from theft, leakage and other factors. More than half of the water PRASA produces (59% in 2014) does not produce revenue.

LEGAL SECURITY

PRASA's senior bonds are secured by a first lien on the gross revenues of the authority. Under the Master Agreement of Trust (MAT), authority revenues flow to a trustee-held account from which monthly transfers are made to the bonds' debt service funds. Only after the required amounts have been set aside for debt service do funds become available for PRASA'S operating expenses and other purposes. The MAT also requires the authority to manage its debt burden and service rates such that gross revenues will cover maximum annual debt service by at least 2.5 times. The bonds will be issued under New York State law, with the exception of any provisions related to receivership.

USE OF PROCEEDS

Proceeds of the current issue will finance elements of PRASA's capital improvement program for the five years ending with fiscal 2019, and will also repay $67 million owed to the GDB and refinance $90 million of short-term bank-held senior debt. As much as $288 million of the proceeds will reimburse the authority for past operating revenue spent on capital improvements.

RATING METHODOLOGY

The principal methodology used in this rating was US States Rating Methodology published in April 2013. The additional methodology used in this rating was US Municipal Utility Revenue Debt published in December 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain 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 certain 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 certain 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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Edward Hampton
VP - Senior Credit Officer
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
VP - Senior Credit Officer
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 Caa3 to Puerto Rico Aqueduct & Sewer's $750M issue; outlook negative
No Related Data.
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