Utility fee securitizations tend to be pretty safe. The customer surcharges backing them are authorized by state law, are not by-passable, and can be adjusted, or “trued up,” periodically if demand falls in order to ensure a level stream of revenue.

But a planned offering by the Puerto Rico Electric Power Authority’s would involve an unusual level risk, according to Moody’s Investors Service.

The primary risk to the deal, part of a restructuring of PREPA’s $8.3 billion in outstanding debt, is the same one facing other so-called stranded cost securitizations, the possibility that the authorizing legislation could be subject to a court challenge or that the jurisdiction could pass new laws rescinding or revamp the charges.

In most outstanding utility securitizations that it rates, Moody’s views these risks are remote; not so for PREPA.

That’s because, over the past year and a half, Puerto Rico’s government “has shown a preference for maintaining public services at the expense of meeting its obligations to bondholders,” the rating agency stated in research published Thursday.

As a consequence, the government has sought to weaken some legal protections for both its public corporation debt and its general obligation bonds. This summer, for example, the government suspended Act 39, a law requiring monthly transfers to its debt-service fund for general obligation bonds. A year earlier, the government enacted a law (subsequently struck down by the US Court of Appeals for the First Circuit) that would have allowed PREPA and other select public corporations to restructure their debt.

In its efforts to win concessions from bondholders, the Puerto Rican government is effectively invoking a “police powers” argument that its commitment to provide for the general welfare of its citizens overrides its legal commitment to bondholders, Moody’s stated in the report. “There would be no assurance that the government would not invoke such an argument to seize or redirect securitization charge revenues.”

Moreover, the higher the UCRC securitization charge to utility customers, the greater the risk of pressure to overturn or any authorizing legislation will be, Moody’s reckons. In a typical UCRC securitization, the percentage of an average residential customer's monthly bill devoted to the securitization charge is less than 10%. But declines in a utility's ratepayer base and in energy consumption would likely result in an increase to the initial securitization charge through the true-up mechanism to ensure timely debt service.

Another risk is that PREPA has many late-paying customers, including its largest customer, the Puerto Rican government. The commonwealth's government and its agencies, along with Puerto Rico's municipalities, account for about 50% of the utility’s accounts receivable. “PREPA has tried to take steps in the past to deal with slow-paying government agencies, including having the Puerto Rican Treasury Department pay the electricity and energy expenses allocated to Puerto Rican government agencies directly to PREPA each month,” the report states.  Nevertheless, the level of government receivables remains high.

The planned bond offering is part of PREPA's restructuring plan, which calls for uninsured bondholders to exchange their existing bonds for new securitization bonds at a discount. PREPA currently has about $8.3 billion in outstanding, of which about $5.8 billion, or about 70%, are uninsured. If all of the uninsured bondholders, who hold about $6 billion in bonds, were to take up the exchange offer, the transaction would be the largest utility cost recovery charge securitization ever.

The securitization would be the first such UCRC transaction whose goal is to restructure the debt of a financially distressed utility

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