Yesterday Moody’s announced its downgrade of the Puerto Rico Electric Power Authority bond ratings from a Baa2 to Baa3 classification, with a negative outlook. Moody’s rationale for the downgrade is the belief that the rating of the PREPA b0nds is closely tied to that of the Commonwealth of Puerto Rico, which also has a negative outlook, and is likely due for a downgrade in the coming weeks, absent a new source of economic growth.
In the specific case of PREPA, the ratings agency cites a lack of economic growth drivers, and negative demographic trends which contribute to the overall economic weakness of Puerto Rico.
The downgrade comes at the heels of the approval in the Legislative Assembly of Puerto Rico of a plan that would have PREPA charge a lower preferential rate to the Puerto Rico Aqueduct and Sewer Authority, which added a $37 million gap to the agency’s finances. Concerns with the ability of PREPA to execute its plan to invest and depend on different energy sources contributed to the downgrade, following the uncertainty to proceed with the previously established proposal to convert the production of oil-based power generation to cheaper natural gas.
Analysts, are attributing the downgrade to several reasons, with Cate Long, a Reuter contributor, indicating the PRASA preferential rate was likely part of the reason for the downgrade, adding to the already bad situation of the agency, which as $8.2 billion in outstanding debt.
— Cate Long (@cate_long) June 20, 2013
For the bond ratings of PREPA to go up, Moody’s says a stabilization of the Commonwealth of Puerto Rico, and the execution of the energy source diversification program would need to happen, both of which the ratings issue considers unlikely to happen in the short to medium term.