Moody’s Downgrades WAPA Bonds to ‘Junk Bond’ Status

The credit rating agency Moody’s Investor Services on Tuesday lowered the rating of V.I. Water and Power Authority bonds to Ba3, what investors consider a "junk bond" rating, the second time in two months the service lowered WAPA’s bond rating.

According to WAPA’s interim Executive Director Julio A. Rhymer Sr., the move leaves the authority’s rating at a continued negative outlook.

“This is a most unfortunate action by Moody’s against the authority as we continue all efforts to stabilize our finances and address the concerns raised initially by Moody’s a month ago at the initial downgrading of the electric system bond ratings,” Rhymer said in a Wednesday news release.

Moody’s further downgraded WAPA’s senior electric system revenue bond rating to B1 from Ba2 and the electric system subordinated revenue bond rating to B2 from Ba3, with a negative rating outlook. This rating action follows on the heels of Moody’s decision last week to downgrade the ratings by five notches of four liens of Matching Fund Revenue Bonds for the Government of the Virgin Islands that are issued by the V.I. Public Finance Authority.

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According to Investopedia, an online source of financial and investment news, the Ba3 rating is "a bond rate which is generally considered speculative in nature and not considered to be investment-grade bonds suited for people wishing to avoid the risk of losing their principal. These bonds are commonly referred to as junk bonds, though this rating indicates that they are towards the more stable end of the junk-bond rating spectrum."

Rhymer said Moody’s action would have "a profound negative effect on WAPA."

"Due to the four-notch downgrade by Moody’s from investment credit grade to junk bond status, the eligible purchasers for WAPA’s bonds have been significantly reduced and, therefore, the authority’s cost to borrow has increased," he said in Wednesday’s news release.

The downgrade also will make access to the credit markets to fund new generation for the power plants on St. Thomas and St. Croix significantly more difficult and costly.

“Tuesday’s rating action will negatively affect our ability to seek credit in the bond market at reasonable interest rates, credit that is necessary to fund critically needed new generators on St. Thomas and St. Croix. With this second rating action, WAPA likely faces higher interest rates from investors and lenders.”

Rhymer said despite the action, acquisition of new, efficient and right-sized generation capacity remains a top priority.

In its statement announcing the reduced rating, Moody cited economic stresses in the territory and failure by WAPA to secure extended lines of credit.

"The rating action is prompted by growing pressure on VI WAPA’s financial longer-term prospects in light of the authority’s direct exposure to economic stresses in the U.S. Virgin Islands and an inability to disconnect itself from local economic conditions, from the slow albeit improved payment pattern of governmental customers and a very high adjusted net pension liability (around $220 million). The amount of this pension liability, which approximates VI WAPA’s funded debt, was disclosed for the first time in the authority’s 2015 financials, which were recently published," the statement from the ratings agency said.

"The rating action also considers the authority’s weak liquidity management characterized by the failure to extend drawn credit lines of around $23 million until their due date end of June 2016," the statement continues.

"Moody’s understands that FirstBank Puerto Rico has extended its line of credit for one year and VI WAPA is still in negotiations with Banco Popular de Puerto Rico to extend the credit lines in the coming days. VI WAPA has historically relied on these credit lines to manage working capital and governmental receivables pressure.”

It continues, “Should all of VI WAPA’s lines of credit be extended, as we anticipate, undrawn availability under the lines is limited. Moreover, we estimate that VI WAPA currently has around $26 million of cash on balance sheet including the proceeds from the $13 million Rural Utilities Services (RUS) loan. VI WAPA’s liquidity profile is further pressured by the need to repay its fuel supplier, Trafigura Trading LLC, past due amounts that approximate $25 million.” “While our expectation is that these amounts will be paid in small increments over an intermediate time frame, the repayment of these obligations add stress to the liquidity profile," the statement said.

Rhymer took exception to the rationale.

“WAPA has been proactive in addressing concerns outlined by Moody’s in March, when the agency placed the authority on review for downgrade," he said. "These concerns are being addressed daily. A primary concern was WAPA’s liquidity position given the necessity to renew its lines of credit with local banks and limited cash on hand.”

He said Moody’s action was unprecedented, given WAPA’s continued increase of cash on hand and the anticipated renewal of the lines of credit.

Rhymer said he believes the ratings actions were not tied to the utility’s financial performance, but instead to Moody’s recent actions against the V.I. government’ s matching fund revenue bond ratings and, in particular, in reaction to the financial crisis and economic uncertainty that continues to loom in Puerto Rico.

Additionally, Rhymer said, commitments have been made by Gov. Kenneth Mapp to include a significant payment to WAPA on behalf of the territorial hospitals and the V.I. Waste Management Authority in the capital budget plan now being considered by the Virgin Islands Legislature. The hospitals and VIWMA are among the more delinquent government entities.

Rhymer described Moody’s actions as extremely unfortunate, noting that the rating agency could not rationally expect WAPA to address all of the areas of concerns raised in the initial downgrade within a one-month period prior to imposing another downgrade of WAPA’s bond rating and continuing the ratings on negative outlook.

“There is no rationale for this heavy-handed approach by Moody’s in light of the fact that the rating agency has openly recognized WAPA’s challenges: operating within a sluggish economy, high unemployment and a narrow local economy, the ongoing struggle of the authority to cover its cost base and operate its facilities efficiently given the multiple systems required for the three islands, significant excess capacity, the age of generation equipment and high retail rates,” Rhymer said.

Rhymer sought to assure WAPA’s customers that while the authority grapples with a negative rating outlook by Moody’s, one that may adversely influence actions to be taken by other rating agencies, all efforts will be made to continue to stabilize WAPA’s finances.

“First and foremost, we will push for a successful renewal of the second credit line, seek out incremental revenue growth within our customer base and ensure improved liquidity management," Rhymer said. "Despite the downgrades and continued negative watch, WAPA maintains some credit strengths, of which Moody’s concurs: conversion to LPG to reduce oil dependence and lower retail cost of electricity; maintaining automatic recovery mechanisms to the rate structure; reducing deferred fuel balance and reduction of government receivables and maintaining the fully cash-funded debt service fund and debt service reserve fund.”

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