New Puerto Rico bond default predicted for June 1

A Puerto Rico municipal bond paid by a private company will default on June 1, two rating agencies expect.

Moody’s Investors Service and Fitch Ratings have both predicted in reports issued in the past month that AES Puerto Rico L.P. will default on its cogeneration facility revenue 2000 Series A bonds payment due June 1. It has $144.7 million outstanding, according to Fitch.

The tax-exempt bonds were issued through the Puerto Rico Industrial, Tourist, Educational, Medical & Environmental Control Facilities Financing Authority.

Moody’s and Fitch both said AES PR’s financial situation has been negatively impacted by a law concerning the disposal of coal ash left over from the generation process. The law requires the ash to be shipped off the island, which has cost AES PR $28 million per year. Fitch projects the costs to continue at $22 million per year through 2027.

The electrical system’s comparatively high levels of power outages have also added costs to AES PR’s operations, the rating agencies said.

AES PR has asked PREPA to make several changes to its power purchase agreement that would provide immediate financial relief and possibly lead to long-term financial stability. Both agencies believe the requests would require multiple entities’ approval and that is unlikely before the June 1 bond payment.

“AES is trying to get more money out of PREPA, which seems like a tough angle to work right now,” Municipal Market Analytics’ Default Trends said on March 22.

In the case of a default Moody’s Vice President Kathrin Heitmann and three other analysts wrote, “Bondholders benefit from traditional project financing features, such as a security interest in all of AES PR’s rights, title and interest in the project, including contracts, revenue, personal property (although these would be released in the event of a PREPA buyout), a trustee administered waterfall of accounts, limitations on liens and indebtedness, sale of asset.”

The prospects for recovery in a default, they said, would be “moderate to high.”

AES PR owes $45 million on the bonds this year, about $48 million next year, about $48 million in 2025, and about $23 million in 2026, when the bond matures.

Moody’s rates the bonds Caa2 and Fitch rates them C.

The Puerto Rico Oversight Board declined to comment on AES PR or the rating agency predictions of default.

Moody’s rates AES Puerto Rico’s parent company AES Corp senior unsecured bonds at Baa3.

Fitch released its rating commentary Thursday and Moody’s released its credit opinion March 15.

AES Puerto Rico, a subsidiary of AES Corp., used the debt service reserves to make the December 2022 bond payment.

AES Corp. did not respond to a request for a comment.

AES PR operates a 454-megawatt coal-fired cogeneration facility in Guayama, Puerto Rico. It sells all its electricity to the Puerto Rico Electric Power Authority, which is currently in bankruptcy. PREPA has continued to make its contractually required payments to AES PR.

In response to inquiries to the Puerto Rico Fiscal Agency and Financial Advisory Authority and the Puerto Rico Electric Power Authority, FAFAA said, “AES Puerto Rico is a private enterprise and as such, we cannot comment on matters related to their financial situation.

The Puerto Rico Industrial, Tourist, Educational, Medical & Environmental Control Facilities Financing Authority (AFICA) was a conduit issuer of the bonds, said Dennis Costa Pacheco, FAFAA director of public affairs and communications. “AFICA has no financial or disclosure obligations,” and there is”no recourse to AFICA or any other Puerto Rico government entity.”