Puerto Rico’s main electricity provider and its bondholders amended a plan to restructure almost $9 billion of debt, reinstating a tentative agreement that expired last week and threatened to worsen the commonwealth’s financial crisis.
The Puerto Rico Electric Power Authority, investors, bond- insurance companies and fuel-line lenders agreed to extend the contract to Feb. 16, giving island lawmakers more time to pass legislation to enable Prepa, as it’s known, to cut its debt and create a new customer surcharge, Lisa Donahue, the utility’s chief restructuring officer, said in a statement late Wednesday. The restructuring support agreement terminated Friday after the legislature failed to pass the measure.
The restructuring pact involves investors and bond-insurance companies lending Prepa about $111 million through a bond sale, according to Stephen Spencer, managing director at Houlihan Lokey, adviser to Prepa bondholders. In return for the new Feb. 16 legislative deadline, investors and insurers agreed to purchase half of the bonds when lawmakers pass the legislation and buy the remaining debt when a petition to implement the new customer surcharge is filed to the island’s energy commission, according to Donahue’s statement.
“The agreements reflect the mutual understanding among Prepa and its key creditors about the importance of Prepa’s financial restructuring and comprehensive transformation,” Donahue said in the statement. “We have a long way to go, and there remain many uncertainties, but if implemented Prepa’s transformation will have a positive, lasting impact on its finances, operations and culture.”
Without a plan, Prepa is at risk of being sued by its creditors and possibly defaulting on payments to investors due July 1. Friday’s termination was a step back for Puerto Rico. The island is seeking to reduce $70 billion of debt. Governor Alejandro Garcia Padilla Saturday warned lawmakers that the island may face blackouts if Prepa is unable to purchase enough fuel.
Legislative leaders have made recent public statements, “which have made it unequivocally clear that they want to get this deal done and that the additional 25 days we are extending beyond the original deadline is sufficient for the legislation to be passed,” Spencer said in a statement late Wednesday.
Without the restructuring, Prepa is unable to pay creditor bills due in about five months, Donahue told a House Natural Resources Committee this month. Prepa faces $428 million in principal and interest to investors on July 1 and another $700 million to its fuel-line lenders, Donahue said.
Prepa 5% bonds maturing in July 2037 traded Wednesday at an average price of about 52 cents on the dollar, down from about 62 cents on Jan. 15, according to data complied by Bloomberg. The bonds yield about 11%. Before Friday’s deadline, Prepa asked creditors to delay that end date to Feb. 12. Investors weren’t willing to extend unless the bond sale was contingent upon the island’s energy commission approving the new customer surcharge. Prepa rejected that proposed change.
Puerto Rico is running out of cash and avoided defaulting on its general obligations in January by taking revenue normally used to repay other securities. Island officials have asked Congress to allow some commonwealth agencies, such as Prepa, to have access to municipal bankruptcy. U.S. Supreme Court is reviewing whether to reinstate a Puerto Rico law that would allow government-owned corporations to turn to the commonwealth’s courts to reduce their debts.
The pact brings together the largest U.S. public power utility, hedge funds, bond-insurance companies, mutual funds and fuel-line lenders. The parties negotiated for 16 months before reaching a deal in December. The final hurdle is for lawmakers to authorize legislation that would enable Prepa to restructure its obligations through a debt swap.
The plan involves investors taking a 15% loss in exchange for new securities with stronger repayment pledges. Insurance companies will provide a surety bond that would protect against the risk of default.
— Check out Puerto Rico’s GO Debt Rallies, but Problems Remain for Bondholders on ThinkAdvisor.