Fitch Downgrades Puerto Rico Electric Power Auth's Rev Bonds to 'C'; Negative Watch Maintained

NEW YORK--()--Fitch Ratings has downgraded $8.2 billion of Puerto Rico Electric Power Authority (PREPA) power revenue bonds to 'C' from 'CC'.

In addition, Fitch is assigning an Issuer Default Rating (IDR) of 'C' to PREPA in anticipation of a distressed debt exchange, which will allow Fitch to reflect the potentially different effects of the exchange on outstanding securities.

The bonds remain on Negative Rating Watch. The IDR is placed on Negative Rating Watch.

SECURITY

The power revenue bonds are secured by a senior lien on net revenues of the electric system.

KEY RATING DRIVERS

RESTRUCTURING OR DEFAULT APPEARS INEVITABLE: The downgrade and maintenance of the Negative Watch reflect Fitch's view that a payment default or restructuring of PREPA's debt obligations is inevitable. Although existing agreements between PREPA and certain creditors (including bondholders) have provided temporary relief, a key component of PREPA's restructuring plan is the reduction of existing debt by means of a proposed distressed debt exchange. PREPA is seeking to complete its restructuring by Dec. 31, 2016.

CASH FLOW CONCERNS REMAIN: PREPA's net cash receipts and existing funds on hand remain insufficient to meet long-term working capital, debt service and other funding requirements. Although debt service payments due July 1, 2016 may be paid, funding for such payments is likely to come from existing bond purchase agreements with existing creditors and new re-lending agreements.

FISCAL 2014 AUDIT RELEASED: PREPA's most recent audited performance (fiscal year ended June 30, 2014) was weak as Fitch-calculated debt service fell to 0.69x, cash on hand totaled only 24 days and leverage rose to 16.1x (total debt/funds available for debt service). The opinion of PREPA's auditor (Ernst & Young LLP) also notes that the financial difficulties experienced by the authority raise substantial doubt about its ability to continue as a going concern.

FINANCIAL PERFORMANCE REMAINS WEAK: For the 12 months ended June 30, 2015, PREPA reported unaudited earnings before interest and depreciation of $770 million, but a change in net position of ($320 million). The net loss was larger than PREPA's budgeted loss of $198 million. Poor performance for the fiscal year was further characterized by declining energy sales (1.6% for the period), declining customers (0.4%), high concentrations of accounts receivable (25% of revenue), high fuel costs (12.3 cents/kWh) and an unwillingness to increase base electric rates.

RATING SENSITIVITIES

NONPAYMENT OR DISTRESSED DEBT EXCHANGE: The Puerto Rico Electric Power Authority's failure to meet debt service obligations as scheduled or execution of a distressed debt exchange, where creditors are offered securities with diminished structural or economic terms compared with the existing power revenue bonds to avoid a probable payment default, would result in a downgrade of the Issuer Default Rating to 'RD' and any affected securities to 'D'. Securities that continue to perform will have ratings maintained at 'C'.

For additional information, please see Fitch's publication 'Distressed Debt Exchange' dated June 8, 2016, available on Fitch's website at www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Revenue-Supported Rating Criteria (pub. 16 Jun 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750012

U.S. Public Power Rating Criteria (pub. 18 May 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1008046

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1008046

Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst:
Dennis Pidherny, +1-212-908-0738
Managing Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Lina Santoro, +1-212-908-0522
Analytical Consultant
or
Committee Chairperson:
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Dennis Pidherny, +1-212-908-0738
Managing Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Lina Santoro, +1-212-908-0522
Analytical Consultant
or
Committee Chairperson:
Doug Scott, +1-512-215-3725
Managing Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
alyssa.castelli@fitchratings.com