Puerto Rico Electric Power Authority bondholders are resisting the island government's effort to overhaul the utility's existing deal to restructure its business and more than $8 billion of bond debt.
Gov. Ricardo Rossell-, who took office in January, has sought to alter terms of the deal that creditors and PREPA had worked on since the summer of 2014 and that was nearing consummation. A proposal Tuesday that would reduce debt service reserves and lengthen maturities, among other unfavorable changes, earned a quick rebuke from bondholders.
"The proposal released today would not simply modify the existing restructuring support agreement," the Ad Hoc Group of Forbearing PREPA bondholders said in a statement. "It would fundamentally change the terms of the deal for PREPA's ad hoc bondholders. The modifications would undermine the value and structural integrity of the new PREPA securitization debt."
The attempt to revise PREPA's bond exchange deal comes as a federal control board begins efforts to stabilize the economy and improve fiscal management in Puerto Rico, with nearly $70 billion of debt outstanding.
According to a Puerto Rico
In the original proposal, the exchanged-for bonds would carry an investment grade from at least either S&P Global Ratings or Moody's Investors Service. In the new proposal, this wouldn't necessarily be the case.
In the original proposal and the new proposal there will be two options for exchanged-for bonds: current interest bonds and capital appreciation bonds. Whereas in the old version the capital appreciation bonds would be interest free for five years, in the new version this period would be extended to seven years. At least 40% of participants would have to choose the CABs for the deal to happen.
In the original proposal the new exchanged-for bonds would mature no later than 2043. In the new deal the maturity would be 2047.
In the new deal, creditors would relend $90 million for July principal and interest. They would also "backstop" the new current interest bond issue up to $350 million.
"Notably, [the existing RSA] deal was supported by both the Puerto Rico legislature and the passage of PROMESA, which specifically promoted preexisting voluntary agreements like the PREPA deal," the bondholders said in their statement. "So far it is the only template for future consensual restructuring agreements between Puerto Rico and its creditors. Furthermore, this deal provides the surest route back to the capital markets for Puerto Rico and should not be put at risk.
"We remain open to constructive, reasonable discussions with the governor and his administration in order to execute a workable deal in the best interests of Puerto Rico and the people of the commonwealth," the bondholder group wrote. "To this end, we believe the RSA that has been in place for over 15 months remains the ideal path forward for achieving this goal."
The FAFAA release also shows that PREPA expects to run out of money in May unless it can get additional loans. To avoid this, PREPA is seeking a loan from its creditors.
The Subcommittee on Indian, Insular and Alaska Native Affairs of the U.S. House of Representatives plans to hold a hearing Wednesday on the PREPA deal.
As of July, PREPA had about $8.3 billion of bonds outstanding.
