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Rating Action:

Moody's downgrades Puerto Rico Aqueduct & Sewer, Highway & Transportation authorities to Ba3; ratings under review

Global Credit Research - 27 Jun 2014

Approximately $10B of rated debt affected

New York, June 27, 2014 -- Moody's Investors Service has lowered ratings assigned to bonds issued by two of Puerto Rico's largest public authorities -- the Puerto Rico Aqueduct & Sewer Authority (PRASA) and the Puerto Rico Highway & Transportation Authority (PRHTA). The rating on PRASA's revenue bonds was downgraded to Ba3 from Ba2. PRHTA's Highway Revenue Bonds (1968 Resolution) were downgraded to Ba3 from Ba1. The Transportation Revenue Bonds (1998 Resolution) were downgraded to Ba3 from Ba2, and the Subordinate Transportation Revenue Bonds were downgraded to B1 from Ba3. The ratings on all remain under review for possible further downgrade. On June 26, the Puerto Rico Electric Power Authority (PREPA) was downgraded to Ba3, on review for further downgrade, from Ba2.

RATING RATIONALE

DOWNGRADES FOLLOW COMMONWEALTH LEGISLATION ALLOWING RESTRUCTURING

The rating downgrades for both PRHTA and PRASA reflect the commonwealth's declaration of intent -- through legislation -- to allow restructuring of public corporation liabilities, which demonstrates a willingness and ability to repay obligations that is weaker than the commonwealth's full faith and credit. The governor's proposal of a public corporation liability law (the Puerto Rico Public Corporations Debt Enforcement and Recovery Act) earlier this week signals a rising risk that the commonwealth (GO bonds rated Ba2, negative) is contemplating a strategic restructuring of its public corporation debt. Public corporations (including PRHTA and PRASA) that could restructure debt under the proposed law should no longer carry credit ratings equal to those of the commonwealth's general obligation (GO) debt. Moody's acknowledges that PRHTA and PRASA have taken steps toward self-sufficiency by raising revenues, and that while their internal liquidity is weak, they do not face immediate liquidity needs that would force them to seek near-term debt restructuring. However, the downgrades further recognize that these entities have longer-term hurdles, including reduced ability to raise new operating revenues or to impose austerity measures, given the island's weak economy and their own high debt burdens. PRASA also faces substantial capital needs for non-discretionary projects to meet environmental mandates.

REVIEW WILL FOCUS ON POSSIBILITY OF DEFAULT VIA RESTRUCTURING UNDER NEW LAW

During its review, Moody's will evaluate the degree to which the new law affects the likelihood of a default through a debt exchange or other restructuring that could result in an economic loss for PRHTA or PRASA's bondholders. Evidence that the proposed legislation is intended to be used to restructure debt of PRASA or PRHTA probably will push the entities' ratings lower still. Moody's will also focus on the fundamental credit positions of PRHTA and PRASA, including their fiscal 2015 budgets, capital needs and financing plans. Emergence of severe liquidity strains also may drive future downgrades, as would lack of market access for critical capital or liquidity needs. Additionally, Moody's review will consider the implications of the specific revenue pledges that support each bond series in light of the restructuring law.

RESTRUCTURING LAW WOULD MAINTAIN 'ESSENTIAL SERVICES' FOR PUERTO RICO CITIZENS

On June 25, the governor of Puerto Rico announced legislation that would provide certain debt-issuing authorities in financial distress with the ability to restructure their liabilities, first through negotiation with bondholders and, failing that, under supervision of a commonwealth court. The law is needed to ensure "the continuity of essential services to the citizens" of Puerto Rico, according to a press release from the government. This statement indicates that commonwealth government officials will not prioritize public corporations' debt service obligations over their core responsibility, which is to provide essential services at reasonable cost to the public.

PROPOSED DEBT LAW WOULD FACILITATE RESTRUCTURINGS OF PUBLIC CORPORATIONS' DEBTS

The Puerto Rico Public Corporations Debt Enforcement and Recovery Act, which has reportedly been passed by the legislature and is likely to be signed by the governor imminently, paves the way for certain corporations (including PRHTA and PRASA) to negotiate new debt terms with bondholders or, failing that, to seek local court approval of restructuring. The impetus for this legislation appears to be the high leverage and strained finances of Puerto Rico's public corporations and the diminished ability of the commonwealth and Government Development Bank (GDB) to support these companies without severely compromising their own liquidity. Until now, commonwealth officials had not publicly advocated steps that would facilitate potential future restructurings of public corporation debts.

RESTRUCTURING LAW HIGHLIGHTS PRESSURES ON GOVERNMENT TO CONSERVE CASH

Implications for other debt-issuing entities of the commonwealth at this point are less clear. In advocating the potential for public corporation debt restructuring, the governor emphasized Puerto Rico's commitment to paying the central government's debt. As described in the government's press release, the law would apply neither to the commonwealth nor its fiscal agent, the Government Development Bank (GDB), both of which are rated Ba2, negative. Likewise, the Sales Tax Financing Corp. (COFINA), with senior- and subordinate-lien debt rated Baa1 and Baa2 negative, also could not seek new debt terms. The new law would have the potential to protect the central government's liquidity from demands of the public corporations and, by extension, its ability to honor GO debt. At the same time, the preparation of a legal path to debt restructuring underscores the liability and economic pressures that face the commonwealth as a whole. As more information about the commonwealth corporations' debt management initiatives becomes available, we will factor it into our ratings on the entities that may seek to restructure, as well as the commonwealth itself.

RATING METHODOLOGY

The principal methodology used in this rating was US States Rating Methodology published in April 2013. An additional methodology used in rating the Puerto Rico Highway and Transportation Authority bonds was US Public Finance Special Tax Methodology published in January 2014. An additional methodology used in rating the Puerto Rico Aqueduct and Sewer Authority bonds was Analytical Framework For Water And Sewer System Ratings published in August 1999. 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.

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.

Edward Hampton
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
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 downgrades Puerto Rico Aqueduct & Sewer, Highway & Transportation authorities to Ba3; ratings under review
No Related Data.
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