Accelerant’s coverage of the situation in Puerto Rico continues. Accelerant Analyst Jay Dulski participated in the S&P webcast on Tuesday, August 4th. Below are his call notes.
A full replay of the call may be found on S&P’s Puerto Rico web page, and current ratings of the Puerto Rico entities may be found on the Puerto Rico Government Development Bank’s (“GDB”) website.
Summary of Recent Downgrades
- “BB” rating affirmed for General Obligations (“GOs”) with a negative outlook.
- PREPA downgraded from “B-” to “CCC” on July 31 with a negative outlook. Reasons included Act 71 passage and nonpayment of electric bills by government entities.
Statements: David Hitchock, Senior Director, U.S. Public Finance, S&P
- There remain continued financing and liquidity pressures on the Commonwealth. These include budget implementation risks, as well as looming problems regarding the Puerto Rico Teachers’ Retirement System (“PRTRS”) and political and union opposition to reforms.
- GOs downgraded on July 11 from “BB” from “BB+” due to Act 71 passage.
- COFINAs (sales tax bonds) and Highway Authority (“PRHTA”) also downgrade on July 11.
- On 7/31, “BB” rating affirmed for GOs following the release and review of new fiscal year budgets.
- Costs for the Commonwealth appear to be manageable for the short run, but the negative rating reflects “no meaningful growth but stabilization of the situation."
- S&P “does not see upside rating potential at this time.”
Statements: Judith Waite, Director, U.S. Public Finance, S&P
- The high cost of oil has been very difficult for PREPA, as they are not yet complete in their conversion from old, inefficient oil plants to newer, more efficient natural gas plants.
- After its own downgrade the GDB cannot provide liquidity anymore, which PREPA needs to purchase oil.
- A $146 million credit line was issued by Citibank and a $525 million line was issued by a consortia led by Scotiabank. Negotiations are currently ongoing as PREPA is approaching an August 14, 2014 deadline.
Statement: Horacio Aldrete-Sanchez, Managing Director and Lead Analytical Manager, U.S. Public Finance, S&P
- Bond insurers are significantly capitalized.
- Assured: $1.5 billion of capital above current levels.
- Notional: $400-$500 million above requirements.
Additional Comments and Q&A
- PREPA has lots of costs to convert its plants to LNG and continue grid modernization. However, cost to complete the LNG conversion is less than $300 million, which is relatively small.
- Regarding exactly how much liquidity PREPA needs, no exact number was given. They have always used bank lines (first from the GDB, and now from Citi and the Scotiabank consortia) to get their oil, and then paid down the lines as revenues come in.
- High cost of oil and inflexibility on rates has hurt liquidity.
- Act 71 represented a shift in attitude and was a very negative signal on the willingness of the government to pay its creditors.
- Remember that the GO issue earlier this year is under NY law and COFINA should be a separate legal entity.
- The question was asked how PREPA would buy fuel if they cannot secure new credit lines. The answer was “no one knows.” They usually buy ahead 30-45 days and have so far been successful negotiating extensions.
- There are current proposals to amend federal bankruptcy law to include Puerto Rican municipalities to seek protection, but that would not affect the current situation.
- There is a proposed bill which would move some of the revenues around, specifically take gas taxes away from the PRHTA and move them to other public corporations. Act 71 allows for full restructuring of public corporation debt, which does make such actions possible.
- There was discussion of discounts that PREPA has given other public corporations, specifically the Puerto Rico Aqueduct and Sewer Authority (“PRASA”). The comments were that the discounts weren’t significant now, but the situation remains “delicate.”
- PREPA’s quality of their asset pool is actually increasing as they modernize/replace their plants and continue the conversion to LNG.
- Regarding the LNG terminal, Accelerate out of Texas is the builder, and is not PREPA funded.\
- Remember that the GDB was downgraded to “BB-“ in July. Its largest borrower is the PRHTA, so a restructuring under Act 71 would be painful for the GDB.
- Jay Dulski, Analyst, Accelerant: “Since municipalities are exempt under Act 71, can you comment on their health and whether the Commonwealth would seek to assist them?” The response was that the Commonwealth has “limited means” due to its financial position, and also that S&P has not examined the health of the individual Puerto Rican municipalities.
- Acts 30 and 31 in 2013 rearranged who got the petroleum taxes, and those risks are already accounted for in the ratings.
- Regarding the conversion of PREPA’s grid to natural gas, there have been delays. The timeline now reads 2018/2019.
- The GDB and the government were late on a large electric bill payment to PREPA, compounding their problems.
- Overall government receivables are otherwise low, but the nonpayment in question was $103 million.
- What’s PREPA’s break even electricity price? Debt service is only $0.065 of their $0.26 base residential rate. $0.06 is their base rate for operations, which has been constant since 1989. The remaining $0.135 (and largest share) is oil cost.