The Puerto Rico Electric Power Authority and its forbearing bondholders reached an
"The agreement is biased toward rate-payers and hedge fund investors that bought PREPA at 30 to 50 cents on the dollar and now stand to make quick capital gain profits of as much as 60% in a year or less," said Richard Larkin, senior credit analyst at H.J. Sims. The agreement, which entails a swap of new bonds for existing securities, makes no reference to any increases in electrical rates. However, it does say that a customer charge supporting the replacement securities would be adjustable every six months.
The agreement announced Wednesday by PREPA and the forbearing group doesn't address its lines of credit or its insured debt. While Assured Guaranty and Syncora Guarantee agreed to extend the forbearance to Sept. 18, National Public Finance Guarantee withdrew from the forbearance Wednesday. NPFG head of investor and media relations Greg Diamond declined to comment.
As of June PREPA had $9.4 billion in outstanding debt, of which $8.6 billion was bond debt. If this agreement goes forward it would constitute the largest bond default in U.S. municipal history. By comparison, by an expansive definition of monetary default, Detroit's bankruptcy affected $7.9 billion of bond debt.
PREPA will have to try to gain debt restructuring agreements with its bond insurers and holders of lines of credit by the end of the current forbearance, Sept. 18.
The Ad Hoc Group of Forbearing Bondholders reached an agreement with PREPA that offers bondholders two options. Both options would involve securitization of the bonds through an alternate financing authority, possibly the Puerto Rico Infrastructure Finance Authority. Currently-held bonds would be exchanged for bonds with par values 85% as large.
The new bonds would be supported by an adjustable charge with semi-annual "true-ups," or adjustments reflecting financial conditions.
The new bonds would carry an investment grade from at least one of the three major rating agencies. Interest rates on the bonds would depend on the rating and which of the two types of bond are held.
The two types of bonds would be current interest and convertible capital appreciation. In both cases no principal would be paid for the first five years. For the current interest bonds, interest would be paid for the first five years and thereafter both interest and principal would be paid. The convertible capital appreciation bonds would pay nothing in the first five years (though interest would accrete) and would pay interest only thereafter.
Depending on what investment grade the bonds received, the current interest bonds would have an interest rate from 4% to 4.75% and the convertible capital appreciation bonds would have an interest rate from 4.5% to 5.5%.
The current interest bonds would be callable at par after 10 years and thereafter. The convertible capital appreciation bonds would become callable 10 years after conversion, callable at par thereafter.
Both versions would have a scheduled maturity in 2043 and a legal maturity at least two years later.
Both bonds would have a debt service reserve of up to 10%, the amount to be determined by what is necessary to receive an investment grade.
Non-forbearing uninsured bondholders would have the option to pick either of these two options, to tender their bonds at a price still to be determined, or to simply sit on their existing bonds. However, for the agreement to go into effect, no more than $700 million of the legacy unwrapped revenue bonds can remain outstanding, though the authority may alter this maximum if conditions warrant.
For the agreement to be consummated, Puerto Rico's government must approve the securitization and must make PREPA more politically independent.
The Ad Hoc group reached a "term sheet agreement" with the authority on Tuesday specifying the basic terms of the deal. The detailed agreement, called the recovery and support agreement, is to be signed by Sept. 18, the date to which the forbearance has been extended.
"Today's announcement represents a significant positive step for all stakeholders involved - including the people of Puerto Rico - and we are pleased to have reached this agreement with PREPA," said Stephen Spencer of Houlihan Lokey, the PREPA Bondholder Group's financial advisor, in a written statement. "We believe it provides PREPA with a fresh start and financial flexibility, with bondholders providing meaningful sacrifices to make that happen. We are committed to working with PREPA to finalize these steps and complete the transaction as quickly as possible."
Lisa Donahue, PREPA's chief restructuring officer, said the agreement was the result of "hard work and compromise" from all parties. "This agreement, when implemented and assuming participation from 75% of uninsured bondholders outside the Ad Hoc Group, is forecasted to reduce PREPA's total debt principal by approximately $670 million, save more than $700 million in principal and interest payments over the next five years, and substantially reduce PREPA's interest rate expense on the exchanged bond debt," she said. "We are pleased that the Ad Hoc Group realized the benefit of our shared burden solution. We will continue to focus on finalizing consensual agreements with the other creditors so that we can continue to implement PREPA's transformation."
Puerto Rico Gov.Alejandro García Padilla said the deal would restore the authority's liquidity, enabling it to invest in infrastructure, creating jobs and spurring growth.
"The economic terms agreed by PREPA and the Ad Hoc Group represent an important step forward in PREPA's restructuring process and is an example of the promising results that can be achieved when the commonwealth and its creditors work together," added Melba Acosta Febo, the president of the Government Development Bank for Puerto Rico.
The Ad Hoc Group of Forbearing Bondholders that agreed to the debt exchange holds 35% of outstanding par value. For the restructuring to advance smoothly the authority may have to bring on board holders of a significantly greater portion of the debt.
H.J. Sims' Larkin and AllianceBernstein director of municipal credit research Joseph Rosenblum said it was quite significant that these other forbearing creditors had not yet reached agreements. More of them will have to reach agreements for any of the agreements to move forward, they said.
Larkin said he thought insurers and holders of the lines of credit have not yet reached agreements with PREPA because they did not agree with the terms. They think they should paid 100% of what is owed them.
Rosenblum said the non-forbearing bondholders may opt for the agreement's options rather than sit on their existing bonds because, "For some who paid less than the workout price, there are profits to be made. For some, the deal represents something better than where the bonds have been trading so to get that price and to be able to move on is value; there will be some who won't like the deal and may have the resources to fight on (litigate) and the willingness to not get paid during that period. It is unclear to me whether [PREPA] can force the new bonds on unwilling holders. The details put out do seem to include the provision that up to $700 million of bondholders could be an acceptable level of holdouts."
Larkin said the non-forbearing bondholders should reject the deal's offers. The proposal most hurts retail buyers, he said. "For all the rhetoric about sharing the pain, rate-holders have not shared, but have gotten priority consideration, seeing their bill drop anywhere from 30 to 50% based on lower oil, but bondholders have been targeted to take even more loss without the benefit of cost savings."
A source close to the bondholders said that non-forbearing bondholders taking one of the forbearing bondholder options would get greater certainty of repayment than by just sitting on their own bonds. They would get "property rights in a future cash flow stream." Whereas PREPA could conceivably have future financial problems and future defaults, the securitized bonds will be safe, the source said.
Rosenblum and New Oak Capital LLC managing director Triet Nguyen said that the PREPA deal may not provide any precedent for the restructuring of the commonwealth's own $72 billion debt, which is being prepared. "Since we've always viewed PREPA as the most solvable of the commonwealth's debt situation, it would be a big mistake to draw any conclusion regarding the restructuring plan for the rest of the commonwealth's debt," said Nguyen. "Any agreement on that front will be much harder to achieve, given all the conflicting interests and potential legal challenges."
The public first learned of the seriousness of PREPA's problems when Fitch Ratings downgraded it to CC on June 26, 2014. These concerns were confirmed when PREPA announced in mid-July 2014 that it had drawn on its debt service reserves to make its July 1 bond payments.
Then in mid-August 2014 the authority entered into forbearance agreement with its creditors. In the forbearance agreement PREPA promised to present debt restructuring plan by March 2. This did not happen.
In September 2014 it hired Donahue of Alix Partners on a temporary basis as its new chief restructuring officer.
Since then forbearance deadlines have been pushed back about a half dozen times.
In June the authority made a debt restructuring proposal to its forbearing creditors. In July the group of forbearing bondholders rejected this proposal and made a counterproposal.
The end of Tuesday was the deadline for the authority and its creditors to reach a Restructuring Support Agreement providing the terms of a debt restructuring. The bondholders have agreed to extend this deadline to Sept. 18.
