Puerto Rico’s faltering electricity monopoly PREPA received another blow this week when Standard & Poor’s downgraded the public corporation’s $8.8 billion of revenue debt to BBB- (5.5) from BBB (6) and placed the rating on CreditWatch with negative implications. This leaves PREPA one small step from junk grade in the three major raters.
Rater | Rating | Quality |
| Fitch | BB | – 4.5 – |
| Moody’s | Ba2 | – 4.5 – |
| Standard & Poor’s | BBB- | – 5.5 – |
In August 2013, PREPA issued $673 million of Power Revenue bonds, which recently traded with a 10 percent yield for maturities due 07/01/2040 (Cusip 74526QA85 shown below). This clearly signals that the market believes these bonds are speculative grade. Standard & Poor’s low investment grade rating of BBB- is lagging the market’s view and is two notches higher than the other major raters.
PREPA’s severe cash problems first surfaced when it was reported that the electricity monopoly had transferred $100 million from a capital construction fund to pay Venezuela’s state-run company Petrobras for oil to run its electricity generators. Caribbean Business reported:
Last month, the PREPA board approved transferring up to $100 million from its capital works fund for the purchase of oil pending the completion of the negotiations.The loan was to pay off a $60 million debt with Petrobras so the company would continue to supply oil to PREPA. The board’s approval was conditioned on paying back the internal transfer in 30 days. The $100 million is one-third of PREPA’s entire capital improvements budget for the year.
Standard & Poor’s, in its rating downgrade, said that PREPA was intending to repay its lines of credit with Citibank and ScotiaBank de Puerto Rico (separate from the internal borrowing described above), but it does not have the full amount of cash. S&P said that nonpayment of the lines of credit is not an event of default for PREPA’s bonds.
PREPA has a $146 million line of credit outstanding with Citibank and a $525 million line outstanding from ScotiaBank de Puerto Rico that matures Aug. 14, 2014, unless renewed. PREPA said that both banks expect to see a long-term plan before agreeing to renew the credit lines.
Caribbean Business reported on June 5th that Citibank and Scotiabank were not jumping to renew PREPA’s lines of credit:
‘Right now, I have nothing. The lines of credit have reached their limits,’ [PREPA Executive Director Juan Alicea] Alicea told reporters last week.‘The talk on the street is that current banks that hold those lines aren’t too willing to renew, and the GDB is struggling to find takers,’ one financial industry source told CARIBBEAN BUSINESS. ‘If Prepa is unable to renew 100 percent of the line with existing or new banks, the GDB may have to step in with a line of credit, eating up some of the GDB’s liquidity.’
Historically, Puerto Rico’s Government Development Bank (GDB) has used its cash to backstop PREPA. The GDB, which provides financial liquidity to Puerto Rico’s government, needs to conserve its own cash as it faces its own liquidity challenges. Caribbean Business again:
[Flores] said that PREPA, with the assistance of the Government Development Bank (GDB), is currently negotiating a renewal of its credit lines and using internal resources to buy oil without affecting ongoing projects while negotiations are underway.
Renewing lines of credit and repaying internal borrowing are not the extent of the cash crisis that PREPA faces. Standard & Poor’s describes collateral calls that PREPA’s interest rate swap counterparties could make (as of June 30, 2013, PREPA’s swaps had a negative fair value of $70.7 million):
The rating also incorporates our view of the support provided by a $100 million line of credit from GDB, which is sufficient to cover potential liquidity requirements associated with PREPA’s swaps. Currently outstanding are a $200 million notional amount under the basis swap with Deutsche Bank and two insured swaps: a $169.5 million notional amount with JPMorgan Chase and $83.3 million with UBS AG.
PREPA also faces long-term debt problems. PREPA’s annual debt service costs will escalate from $530 million in 2013 to $655 million in 2017. As of June 30, 2013, PREPA had slim debt service coverage of 1.37 times.
A confidential report prepared for the Puerto Rico government says that PREPA is worth about half its debt. The report suggests that operational improvements at the electricity monopoly could increase its value. But the report does not address the risk of world oil prices spiking due to war in Iraq or other unrest in the Middle East.
Caribbean Business reported on PREPA’s need to raise electricity rates:
The Puerto Rico Electric Power Authority’s cash-flow situation has hit bottom, forcing the government power utility to explore all alternatives, including raising rates, PREPA Executive Director Juan Alicea Flores said last week.In fact, PREPA officials announced Friday that its projected accumulated deficit for this fiscal year will be $1.036 billion, and the PREPA board ordered Alicea to develop a new rate proposal for consideration by the new regulatory commission created by the Electric Sector Reform Law 57 enacted by the governor last week.
PREPA may need to raise rates, but on Wednesday the president of the Union of the Electricity Industry and Irrigation (UTIER), Figeroa Angel Jaramillo, called on the people not to pay the electricity and water bills. UTIER has voted to strike and is said to be waiting to surprise the government with a work stoppage.
What lies ahead? It is clear to the market that PREPA is in need of restructuring. But Puerto Rico sources tell me that the Governor Alejandro Garcia Padilla refuses to consider abrogating or restructuring any debt payments. Something has to give.
Further:
Prepa 2013 Annual Report
Moody’s on Prepa
Fitch on Prepa
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