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Rating Action:

Moody's downgrades PREPA's ratings to Caa3 from Caa2; outlook negative

Global Credit Research - 17 Sep 2014

New York, September 17, 2014 -- Moody's Investors Service has downgraded the rating for Puerto Rico Electric Power Authority's (PREPA) $8.8 billion of Power Revenue Bonds to Caa3 from Caa2. This rating action concludes the rating review that Moody's initiated on July 1, 2014. PREPA's rating outlook is negative.

SUMMARY RATING RATIONALE

The downgrade considers the uncertainty that persists regarding the details of the expected restructuring plan by PREPA, the implementation risk that continues regarding PREPA's ability to execute on its multi-year fuel conversion plan as well our belief that any such debt restructuring will involve some degree of impairment for bondholders. The downgrade to Caa3 further incorporates a belief that the expected recovery rate could approximate 65% to 80% in the event of a default, which we believe is highly likely. While the recently entered Forbearance Agreement provides time for parties to work on a consensual restructuring plan, we believe that any restructuring proposal will be influenced, to some degree, by the Commonwealth's politics, particularly given the weakened and lackluster state of the Puerto Rico economy. We also believe that implementation risk is high with respect to completing the multi-year fuel conversion plan, an important element for PREPA, and portions of this risk are outside of the PREPA's management control. The extensions of PREPA bank lines to March 31, 2015, and the Forbearance Agreement addressed immediate issues, but longer-term structural and liquidity issues remain.

PREPA's financial condition remains fragile, as bondholder debt service due January 1, 2015 is expected to be satisfied by draws against various reserve accounts held by a trustee, and as part of the Forbearance Agreement, liquidity needs can be satisfied by draws under the construction account reserve. In the end, the ability of the Forbearance Agreement to remain in place depends upon the progress towards completing a complex restructuring plan. For example, PREPA could fall behind on its milestones and jeopardize the forbearance. The Ad Hoc group of bondholders may be working constructively with each other now, but this could change. There is also the possibility of political interference on the part of the Commonwealth government. While we view the existence of the Forbearance Agreement and the September 4th appointment of a Chief Restructuring Officer as constructive data points, we cannot rule out the possibility that efforts to restructure could be derailed resulting in the Forbearance Agreement being terminated and PREPA moving to restructure under the newly enacted Debt Enforcement and Recovery Act (Recovery Act).

During the period of the forbearance, PREPA will make required payments on the bonds as stipulated in the Forbearance Agreement while it works on a restructuring plan, which is to be completed by March 2, 2015. The stipulated payments are to be put into a separate Specified Period Defeasance Fund with the Trustee, sufficient to enable PREPA to make its next scheduled interest payment on the bonds of $214 million. Also during the period of the forbearance, PREPA must continue to pay interest on the outstanding bank lines. Failure to comply with the terms of any forbearance agreement will cause an early termination of that forbearance agreement and will cross-terminate to the other forbearance agreements. If PREPA were to fail to make its required payments or to meet the milestones, the forbearance would unravel, and bondholders will be free to exercise their remedies and take other legal action.

We still believe that a restructuring is most likely in the early part of 2015, and the timeline and milestones spelled out in the Forbearance Agreement support this. However, there is the possibility that a restructuring announcement could happen sooner and PREPA could avail itself of the new Recovery Act if negotiations among bondholders, PREPA and the government break down.

The Caa3 rating and the negative outlook incorporate this uncertainty. The negative outlook also considers the uncertainty and obstacles to executing on a complex restructuring plan as well as the long-term capital investment program focused on converting oil-based power generation to natural gas in the face of a very challenging economic environment within the Commonwealth.

WHAT COULD CHANGE THE RATING - UP

In light of the negative outlook, the rating is not expected to move upward over the near-to-medium term. There could be stabilizing and upward pressure on the rating and outlook if the restructuring is announced and the ensuing prospects for recovery are better than the Caa3 would suggest.

WHAT COULD CHANGE THE RATING - DOWN

The rating could be pressured downward if the Forbearance Agreement collapses and/or the prospects for recovery worsen.

RATING METHODOLOGY

The principal methodology used in this rating was U.S. Public Power Electric Utilities with Generation Ownership Exposure published in November 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Richard Donner
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

Chee Mee Hu
MD - Project Finance
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 downgrades PREPA's ratings to Caa3 from Caa2; outlook negative
No Related Data.
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