PREPA debt restructuring caught in a Catch-22

01 February 2019
The Puerto Rico Electric Power Authority’s (PREPA) latest proposed restructuring support agreement (RSA) for the utility’s USD 9bn in debt is going nowhere fast, said a source close to the situation and three sources familiar.
 
“The number of parties working at cross purposes has created a level of cacophony and confusion that has complicated the ability to talk about debt,” said the source close.
 
“The restructuring won’t progress until the parties are willing to have a real negotiation. Right now, the monolines are entrenched in their call for a receiver, and [the] Puerto Rico [government] is not going to negotiate with a gun to its head,” said the first source familiar.
 
PREPA monoline insurers, National Public Finance GuaranteeAssured Guaranty Ltd. and Syncora, which cover USD 2.084bn, or 25.1%, of the utility’s USD 8.3bn in bonds outstanding, oppose the proposed RSA because they say it does not attend to critical problems in PREPA’s governance and operations, among other matters.
 
For a consensual deal to proceed, two-thirds of the total voting claims must support the plan. “[PREPA] bondholders are restricted, and they are going to be restricted for a very long time,” said the first source familiar, adding he is advising investors to stay away from PREPA.
 
PREPA and the PREPA Ad Hoc Group — which owns USD 3.179bn, or 38.3%, of the utility’s bonds outstanding — entered into the RSA on 30 July 2018. Since then, the proposed accord has been extended 14 times and is set to expire today (1 February).
The latest RSA calls for a payout of 67.5 cents as well as growth bonds tied to the economic recovery of Puerto Rico.
 
The Financial Oversight and Management Board imploded PREPA’s initial RSA with creditors, which included monoline insurers, after nearly three years of negotiation because it did meet the board’s requirement that the deal ensure an electrical rate of 21 cents per kilowatt hour.
 
Kibosh on privatization
 
Problems resolving PREPA’s debt may also put the kibosh on the electric utility’s proposed privatization of its generation assets, said the three sources familiar.
 
“The likelihood of [PREPA’s] divestiture [of assets] actually happening now is low because most people are going to want to wait around and see how the debt matter is resolved. Whoever is buying PREPA is going to want to know how to turn this into a money-making proposition and you can’t do that with USD 9bn in unresolved debt,” said the second source familiar.
 
The commonwealth is contemplating a deadline of 31 December 2020 to complete the sale of PREPA’s generation assets.
 
Trading seems to bear out that the market has lost its initial enthusiasm for PREPA’s proposed RSA.
 
A USD 307.5m tranche of 2013 PREPA power revenue bonds issued at 96.936 to yield 7.02%, maturing in 2036, hit a 12-month high of 66.625 and no yield on 9 August 2018, a little over a week after the latest proposed RSA was announced. Since then, the price has dropped by 11.9% to 57.708 and no yield on 29 January, reported Electronic Municipal Market Access.
 
The Puerto Rico Fiscal Agency and Financial Advisory Authority, PREPA, and Assured did not return calls for comment, while National and PREPA Ad Hoc Group declined requests for comment.