NEW YORK Feb 10 Moody's Investors Service
confirmed on Monday it had cut the rating of the Puerto Rico
Electric Power Authority to junk status, saying the island's
shrinking economy and population will hurt the already
cash-strapped authority's ability to invest.
The downgrade was made late on Friday several hours after
Moody's cut the fiscally challenged U.S. territory's general
obligation rating to Ba2, two notches below investment grade.
Moody's said that downgrade contributed to the decision to
drop the rating on $8.8 billion in PREPA power revenue bonds to
Ba2, down from their previous investment grade rating of Baa3.
"PREPA's rating is closely tied to the rating of the
commonwealth given its reliance on Government Development Bank
as a source of working capital liquidity as well as the
importance of revenues from municipal authorities (estimated at
13 percent of PREPA's revenues)," Moody's said in a statement.
"Moreover, the continued weakness in the economy of Puerto
Rico, including the lack of economic growth drivers and negative
demographic trends, weigh heavily on today's rating action and
on PREPA's ability to meet numerous strategic initiatives."
Moody's also highlighted PREPA's tight liquidity situation -
it said the agency had just 11 days worth of cash on hand for
year-end 2013 - and said its earnings were only just enough to
cover interest on outstanding debt.
That is not likely to change, Moody's said, particularly
given high electric rates, the weak economy and PREPA's need to
finance important capital expenditures with debt.
PREPA's woes reflect those of Puerto Rico as a whole. With
some $70 billion of tax-free debt - nearly four times the $18
billion owed by bankrupt Detroit - Puerto Rico has
struggled to climb out of a multi-year recession and get a
handle on a chronic budget shortfall.
Moody's downgrade of the commonwealth followed an earlier
one by Standard & Poor's. That has raised concern in financial
markets that the government may have to restructure its debt.
In a separate report dated Feb. 3, Moody's said that one of
its market-based measures indicated that Puerto Rico was at a
greater risk of defaulting within the next year than all 50 U.S.
states and sovereign issuers save Argentina and Venezuela.
The government has said it wants to balance the budget by
fiscal year 2015 and has raised taxes, cut spending and passed
reforms of its pension system, which are now under court review.