Recipient email addresses will not be used in mailing lists or redistributed.
Use semicolon to separate each address, limit to 20 addresses.
characters you see
You have successfully sent the research.
Please note: some research requires a paid subscription in order to access.
Global Credit Research - 06 Apr 2017
Approximately $8.0 billion in debt affected
New York, April 06, 2017 -- Moody's Investors Service has revised the outlook on the Puerto Rico Electric Power Authority (PREPA) to negative from developing, while affirming the Caa3 rating on PREPA's approximately $8.0 billion of Power Revenue Bonds.
Summary Rating Rationale
The change in outlook to negative from developing considers the uncertainty that persists regarding the final terms of the restructuring plan between PREPA and its creditors. The rating action also reflects the recent outlook change to negative from developing on the Commonwealth of Puerto Rico (Commonwealth: Caa3 negative), given the uncertainty around restructuring plans for debt issued by the Commonwealth and the economic challenges across the island that also affect PREPA. The Caa3 rating affirmation incorporates our continued belief that the expected recovery rate for creditors could approximate 65% to 80% in the event of a default, which is highly likely.
PREPA and its creditors had reached a broad outline of a consensual restructuring plan more than a year ago in January 2016, known as the Restructuring Support Agreement (RSA), which calls among other things for bondholders to exchange their bonds for new securitization bonds at an exchange ratio of 85%. The parties also entered into a Forbearance Agreement to reduce the risk of litigation and to allow time to work on a definitive restructuring agreement. The RSA and Forbearance Agreement have been extended numerous times while the parties continued to negotiate, and the latest expiration date was March 31, 2017. The new Puerto Rican administration put forth a proposal to modify the terms of the RSA in order to seek additional concessions from bondholders, which introduces additional risk and uncertainty to the execution of a final consensual agreement. We understand that the parties agreed to extend the RSA until April 13, 2017. While this suggests that the parties are close to a final agreement, this also highlights the fragility of the situation. There is the possibility that the consensual deal could unravel, which could lead to protracted litigation between PREPA and its bondholders.
On March 21, 2017, PREPA, the Puerto Rican government and its fiscal agent, the Fiscal Agency and Financial Advisory Authority (or AAFAF, its initials in Spanish) announced proposed revisions to the terms of the RSA. The exchange ratio of 85% would be maintained, but there were other significant proposed modifications. Among other things, the exchange would be split into PREPA and securitization tranches. In addition, the length of periods of principal deferral and capitalization of interest would be increased from 5 to 7 years, and the overall maturity of the new deal would be extended to 2047. Our view is that should a deal emerge, it is likely to be somewhere in between the original RSA and this latest proposal, but its final outcome is unknown at this stage, and as such, execution risk remains high.
The Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which was enacted by the US government last year and established an oversight board to approve eventual debt restructuring plans, allows PREPA to implement its restructuring plans as part of a Pre-existing Voluntary Agreement by providing a mechanism for voluntary agreements to adjust debts through Title VI of PROMESA (Creditor Collective Action). Under PROMESA, there is also a provision under Title III that allows for in-court adjustments of debts similar to a Chapter 9 bankruptcy. While we understand that it is still PREPA's intention to avail itself of Title VI, the utility could utilize Title III if negotiations with creditors break down.
The outlook change also reflects PREPA's worsening liquidity. We understand that PREPA is forecasted to have insufficient internal liquidity to meet its next debt service payment on July 1, 2017 of about $400 million, representing principal and interest. In the absence of creditors lending money to PREPA, which has occurred in the past, PREPA will default on this payment. While creditors have provided support in the past, there is increasing uncertainty as to whether parties could reach an arrangement given the uncertainty about execution of the RSA.
Notwithstanding these negative trends, PREPA has achieved several positive milestones, which gives rise to a restructuring occurring. On January 10, 2017, the Puerto Rico Energy Commission (PREC) approved a final rate order for a base-rate increase for PREPA of 1.025 cents per kilowatt-hour (kWh). This base-rate increase is the first since 1989 and will help to stabilize the utility's longer-term financial position. This is in addition to PREC's approval of a non-bypassable 3.1 cents/kWh surcharge to cover debt service on the securitization bonds that PREPA expects to issue as part of its debt restructuring. Also, three of the seven lawsuits brought by interested parties challenging the validity of the surcharge and PREPA's restructuring have been withdrawn. In addition, a lower court recently ruled in PREPA's favor in a fourth validation case, a case brought by PREPA's largest union, which has filed an appeal with the Puerto Rico Supreme Court. According to PREPA's management, they have succeeded in consolidating the remaining three lawsuits into one case.
The negative outlook 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. While we believe that an out-of-court restructuring continues to be the most likely outcome, the negative outlook factors in the fragile nature of the agreement and the chance that such an agreement may unravel causing parties to pursue more litigious avenues.
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. The outlook could stabilize and upward rating pressure could emerge if the restructuring occurs on terms that are largely similar to the terms contemplated in the RSA.
WHAT COULD CHANGE THE RATING - DOWN
The rating could be pressured downward if the RSA collapses and/or the prospects for recovery worsen.
The principal methodology used in this rating was U.S. Public Power Electric Utilities with Generation Ownership Exposure published in March 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
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
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. 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 or in preparing the Moody’s publications.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody’s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com
under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be reckless and inappropriate for retail investors to use MOODY’S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser.
Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.