In accordance with its practice of regularly reviewing ratings on Rating Watch, Fitch Ratings maintains its Rating Watch Negative status on $3.4 billion of outstanding Puerto Rico Aqueduct and Sewer Authority, Puerto Rico (PRASA, or the authority) senior lien revenue bonds.
The bonds are currently rated 'B+'.
SECURITY
The bonds are secured by a gross lien of all authority revenues related to PRASA's combined water and sewer system (the system), as defined in the amended master agreement of trust (MAT), senior to all other debt or expenses of PRASA. Authority revenues include operating revenues, as defined in the amended MAT (e.g. user charges and impact fees), as well as governmental funds available to pay current expenses; amounts from the Commonwealth of Puerto Rico (the commonwealth) for payment of commonwealth guaranteed indebtedness (CGI) or commonwealth supported obligations (CSO); and any amounts transferred from the budgetary reserve fund, as created in the amended and restated Fiscal Oversight Agreement between PRASA, the commonwealth and the Government Development Bank for Puerto Rico (GDB). PRASA revenues received from the commonwealth for CGI and CSO are not subject to lien of the MAT and are not available to pay debt service on the bonds.
KEY RATING DRIVERS
NEGATIVE WATCH MAINTAINED: The Negative Watch continues to reflect concerns relating to liquidity requirements that are dependent on third-party extension of credit or market access. PRASA has certain bank lines of credit (LOC) outstanding that mature in March 2015. In addition, PRASA has a sizeable and largely regulatory-driven capital improvement program (CIP) that necessitates ongoing market access in order to fund.
SELF-SUFFICIENT OPERATIONS FROM RATE HIKE: PRASA enacted a 67% average rate increase for fiscal 2014 which allowed PRASA to become self-sufficient without assistance from the commonwealth and the GDB. This alleviates a major concern that had developed in recent years. Continued self-sufficient operations are expected over at least the next several years.
FAVORABLE CAPITAL DEVELOPMENTS: The CIP continues to be substantial but negotiations with regulators are expected to lead to a cap in required annual spending. Also, the expected annual cap is expected to be meaningfully less than recent CIP projections.
HIGH UTILITY RATES: The rate hike for fiscal 2014 pushed residential charges well above Fitch's 2% of median household income affordability measure and increased bad debt levels. However, limited to no additional increases in user charges are expected through at least fiscal 2018.
WEAK DEBT PROFILE: Debt levels are high both in terms of absolute dollars as well as the relative percentage of carrying costs to revenues. Costs will also continue to increase as the system pushes forward with its ongoing CIP funding but the rate of growth should slow from previous expectations.
SOLID MANAGEMENT: PRASA management is strong. In addition, GDB provides advisory support. Unlike recent years where PRASA relied extensively on commonwealth and GDB financial funding, limited to no financial support is expected over the foreseeable future.
WEAK BUT EXTENSIVE SERVICE AREA: The service territory is diverse, although weak economic conditions have been protracted and customer wealth levels are limited.
ESSENTIAL UTILITY: The system provides an essential service to the residents of Puerto Rico.
RATING SENSITIVITIES
MARKET CHALLENGES: Difficulty or perceived inability to refinance or extend PRASA's outstanding bank LOCs and access funds for its CIP in the coming weeks would put additional negative pressure on PRASA's rating. Alternatively, a refinancing or long-term extension of the maturing LOCs could warrant an affirmation and subsequent removal of the Rating Watch Negative.
CHANGES IN COMMONWEALTH RATING: PRASA's revenue bonds likely will be influenced by movement of the commonwealth general obligation rating for the foreseeable future given the commonwealth's historical actions and ability to expose PRASA to potential fiscal and operational challenges.
WEAKENED FINANCIALS: Deterioration in financial results that threatens PRASA's ability to achieve at least break-even results would likely result in a downgrade given the weakened credit quality of the commonwealth and its constrained ability to provide ongoing support to PRASA.
CREDIT PROFILE
PRASA provides water service to virtually the entire island, including the roughly four million residents and five million annual tourists; sewer service is limited to around 60% of the island.
WATCH RESOLUTION TIED TO SUCCESSFUL MARKET ACCESS
Fitch expects to resolve the current Negative Watch upon PRASA's ability to refinance or extend its outstanding LOCs (which mature in March 2015) and obtain funding for near-term capital projects. Fitch downgraded PRASA's bonds in July 2014 and placed them on Rating Watch Negative following a downgrade of the commonwealth's GO bonds and implementation of the Puerto Rico Public Corporation Debt Enforcement and Recovery Act, which established a restructuring regime for public corporations.
Additional information on the commonwealth is available in Fitch's July 9, 2014 press release, 'Fitch Downgrades Puerto Rico GO, Sales Tax, Retirement System & Water Revenue Bonds', available at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Revenue-Supported Rating Criteria' (June 2014);
--'U.S. Water and Sewer Revenue Bond Rating Criteria' (July 2013);
--'2015 Water and Sewer Medians' (December 2014);
--'2015 Outlook: Water and Sewer Sector' (December 2014).
Applicable Criteria and Related Research:
Revenue-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012
U.S. Water and Sewer Revenue Bond Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715275
2015 Water and Sewer Medians
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818409
2015 Outlook: Water and Sewer Sector
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=818410
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=964855
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