Fitch Maintains Negative Watch on Puerto Rico Aqueduct & Sewer Authority Rev Bonds

AUSTIN, Texas--()--Fitch Ratings maintains the following Puerto Rico Aqueduct and Sewer Authority (PRASA) bonds on Rating Watch Negative:

--Approximately $3.3 billion in outstanding senior lien revenue bonds, series A, B, 2012A and 2012B 'CC';

--Approximately $285 million in outstanding revenue refunding bonds, series 2008A and 2008B (guaranteed by the Commonwealth of Puerto Rico) 'CC'.

SECURITY

The senior 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, senior to all other debt or expenses of the authority. The series 2008A and 2008B bonds are payable from system revenues subordinate to all PRASA obligations except Commonwealth of Puerto Rico (the commonwealth) supported obligations and obligations payable from surplus revenues. The series 2008A and 2008B revenue refunding bonds are further secured by a guaranty of the commonwealth. Currently, no credit is given for the commonwealth guaranty.

KEY RATING DRIVERS

NEGATIVE WATCH MAINTAINED: Maintenance of the Negative Watch continues to reflect that a restructuring of PRASA's debt is probable. PRASA has historically been excluded from discussions of a broader restructuring of commonwealth debt, although PRASA's market access difficulties and strained cash flows heighten the risk of a possible restructuring of its debt. A resolution by the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) Financial Oversight and Management Board (FOMB) to include PRASA as a covered entity under PROMESA further heightens the risk of restructuring.

CASH FLOW CONCERNS REMAIN: PRASA's net cash receipts and existing funds on hand remain insufficient to meet long-term working capital, debt service and other funding requirements. PRASA's financial estimates for fiscals 2017-2026 indicate annual revenue shortfalls of between $287 million to $440 million, including funding for the capital improvement program and assuming no market access.

FISCAL 2015 AUDIT RELEASED: PRASA's most recent audited performance (fiscal year ended June 30, 2015) was weak as Fitch-calculated debt service fell to 0.97x, cash on hand totaled only 20 days and free cash to depreciation was a negative 4%. PRASA's auditor (Kevane Grant Thornton LLP) has also noted that financial difficulties experienced by the authority raise substantial doubt about its ability to continue as a going concern.

FISCAL 2016 PERFORMANCE REMAINS WEAK: For the 12 months ended June 30, 2016, PRASA estimates that net operating income, excluding $90 million transferred from the rate stabilization fund (RSF), equaled $359 million, down 15% from the prior year on lower revenues affected by severe drought conditions. Resulting debt service coverage on senior lien bonds as calculated by Fitch was 1.36x, including $90 million related to a bank term loan and the $90 million RSF transfer, while total debt service coverage was 1.05x. For the year PRASA also suspended its capital improvement program for lack of funds and has indicated that it currently owes over $100 million in debt to contractors and vendors.

RATING SENSITIVITIES

ANNOUNCEMENT OF DEBT RESTRUCTURING: Any negotiated restructuring resolution would be evaluated for its effect on bondholders. Any restructuring that does not result in full and timely payment of bonds according to the original terms promised, would result in a downgrade to 'C' upon agreement by the required holders and 'D' upon execution.

For additional information, please see Fitch's publication 'Distressed Debt Exchange' dated June 8, 2016, available 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/site/re/750012

U.S. Water and Sewer Revenue Bond Rating Criteria (pub. 30 Nov 2016)

https://www.fitchratings.com/site/re/890402

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1016184

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Doug Scott
Managing Director
+1-512-215-3725
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Karen Krop
Senior Director
+1-212-908-9105
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Doug Scott
Managing Director
+1-512-215-3725
Fitch Ratings, Inc.
111 Congress, Suite 2010
Austin, TX 78701
or
Secondary Analyst
Karen Krop
Senior Director
+1-212-908-9105
or
Committee Chairperson
Dennis Pidherny
Managing Director
+1-212-908-0738
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com