Moody's and S&P lower Puerto Rico Aqueduct Authority ratings to Ba and BB.

Moody's Investors Service and Standard & Poor's Corp. yesterday downgraded the outstanding bonds of the Puerto Rico Aqueduct and Sewer Authority to below investment-grade status.

Moody's downgraded to Ba from Baa about $408 million of the water and sewer authority's series 1988A and 1988AA revenue bonds, while Standard & Poor's lowered its ratings on $372 million of the series 1988A bonds to BB from BBB.

"The severity of the rating action speaks to the need for fundamental change [at] an agency that has been experiencing problems for over 12 years," said George Leung, vice president and managing director at Moody's. "They face enormous capital needs that center around basic maintenance, [and] the need for fundamental change in [the authority's] operations and fiscal condition are critical."

But given the fundamental necessity of the services provided by the authority, known as PRASA, rating agency officials expressed confidence that major efforts will be taken to reform the authority's financial and operating performance.

"The essentiality of service provided was taken into consideration in keeping the rating a double-B," said Jane Eddy, a director at Standard & Poor's. "If it was a different type of entity, we might have taken a more dire view."

In reaction to the downgrades, the Government Development Bank for Puerto Rico issued a statement late yesterday saying legistation will be introduced next week to provide a full guarantee from the Commonwealth of Puerto Rico on PRASA's outstanding series 1988A and 1988AA revenue bonds, or any debt issued to refund them.

"We would want to see the legislation passed and review it, but we would reconsider the rating in light of the guaranty," said James Dearborn, assistant vice president at Moody's.

The plan to guaranty PRASA debt relates to a "massive rehabilitation plan for the authority which began about a year ago, highlighted when the governor and executive director put PRASA on state of emergency," said Marcos Rodriguez-Ema, president of the bank, which acts as a financial adviser to the commonwealth wea its agencies. "The actions by S&P and Moody's do not take us by surprise but add another wrinkle to the rehabilitation."

Puerto Rico's legislature is currently reviewing a plan detailing expense-cutting measures proposed for the authority, Rodriguez-Ema said.

The Government Development Bank also said it is "providing a par bid to any invest of such PRASA bonds who wished to sell its securities prior to the legislative approval of the guarantee."

Owners of the bonds will have to weigh the risk of a failure of the legislation to guarantee PRASA's debt to be passed against the fact that a guarantee will increase their value, said Rafael Costas, senior research analyst at Franklin Advisers Inc., which had about $750 million of Puerto Rico and its agencies' bonds as of Feb. 1.

Standard & Poor's said the downgrade reflects: the authority's inability to implement a rate increase since 1986 that none are currently planned; a continually declining financial position; and uncertainly regarding funding for a mandated $2.4 billion capital improvement plan.

Moody's said the authority expects to finance the capital program with $1.3 billion of revenue bonds, $280 million of commonwealth capital grants, and other funds derived from operations.

The Government Development Bank for Puerto Rico has extended $248 million in lines of credit in anticipation of long-term borrowing for the capital program, but "implementing [it] may prove difficult because of limits imposed by the additional bonds test of the trust agreement," Moody's said.

Moody's cited additional factors contributing to the downgrade, including PRASA's increased levels of uncollected bills, inability to generate expected savings from staff reductions and increased productivity, uncertainty from the fact that the authority's largest labor union has been working without a contract since 1993, and an extended drought in Puerto Rico.

The Moody's press release highlighted a declining trend in the authority's financial position that has become particularly severe from 1991 to 1993. During that time, the authority suffered operating deficits of $21 million in 1991, $28.8 million in 1992, and $48 million in 1993. An additional $40 million loss is projected for 1994, Moody's said.

Debt service coverage levels fell from 1.7 times in fiscal 1991 to1.45 times in the current year. In addition, the authority's cash position has "reached a critical stage," Moody's reports, with $39.1 million on hand at April 30. But the authority has been able to maintain a positive cash position only by delaying pension and other payments to commonwealth agencies, the release said.

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