Puerto Rico Electric Power Authority's latest debt restructuring agreement with bondholders and insurers came under criticism Monday for failing to lower operating costs.
The Puerto Rico Oversight Board announced on Friday the signing of the Restructuring Support Agreement covering more than $8 billion in debt. Before the deal went into effect, Puerto Rico’s legislature and Puerto Rico bankruptcy Judge Laura Taylor Swain would have to approve it. A bondholder vote is also expected, though Swain could force a similar agreement should bondholders reject it.
“While the restructuring will lower their debt service costs, it doesn’t seem to address any changes to the high operating costs, particularly the need for so many employees,” said Evercore Director of Municipal Bond Research Howard Cure. “Consequently, electric rates will remain high especially when considering the surcharge to service the restructured debt. It remains to be seen if PREPA can go forward and receive market access to finance the capital program necessary to modernize the system.”
In the deal current bonds would be exchanged for Tranche A and Tranche B bonds. Tranche A bonds would have a par value equal to 67.5% of the value of existing bonds. They would be tax-exempt, hold a 5.25% coupon, and have a 33 year expected maturity and a 40 year final maturity.
Tranch B bonds would have a par value equal to 10% of original principal amount and would be "growth bonds," which would only be payable if there were certain levels of island electrical use. The tax-exempt bonds would have a 7% interest rate and the taxable bonds would bear 8.75%. Interest would be paid in additional tranche B bonds rather than cash. They would have a 47-year final maturity.
Prior to the final approval of the RSA, PREPA will start to charge 1 cent per kilowatt-hour to support the debt. After final approval a “Transition Charge,” would be added to customers’ bills. This would start at 2.768 cents/kwh in fiscal year 2021 and rise gradually to 4.552 cents/kwh in fiscal year 2044 and the following years.
“Contrary to the 2016 restructuring agreement, the transition charge does not increase if there is a reduction in the sale of energy,” said a press release from the office of Puerto Rico Gov. Ricardo Rosselló. He was referring to an earlier deal that was subject to negotiations in 2016, and was rejected by Rosselló and the Oversight Board after it was created under the Puerto Rico Oversight, Management and Economic Stability Act of 2016.
According to this release, the Puerto Rico Fiscal Agency and Financial Advisory Authority “estimates that, during the next 10 years, the agreement will reduce debt service by approximately $3 billion and more than 40% in relation to the terms of the restructuring agreement negotiated by the previous administration in 2016.”
The Ad Hoc Group of PREPA Bondholders released a statement saying, “We encourage other bondholders to sign on to the deal quickly in order to maximize their own recoveries and provide certainty on PREPA’s path forward.”
According to bond insurer analyst Mark Palmer, BTIG managing director, MBIA had $1.089 billion of gross insured exposure to PREPA debt and Assured Guaranty had $848 million on net insured exposure to PREPA debt.
The deal offers Assured and holders of Assured-insured bonds several options for dealing with the restructuring of PREPA’s bonds. Certain options would involve Assured insuring the new securitized bonds. With insured Tranche A bonds, Assured would be paid a sum equal to 0.5% per year of these bonds’ principal amount. The transition charges would be used to make these payments.
In addition, Assured is to be given a one-time payment in the form of Tranche A bonds having a principal equal to 2% of the expected aggregate cash flow of any Tranche B bonds it insures.
The agreement specifies no similar options for National Public Finance Guarantee, which is no longer writing new policies and declined to comment for this story.
Assured said that it “believes that the additive value created by attaching its guarantee to the securitization exchange bonds would materially improve its overall recovery under the transaction, as well as generate new insurance premiums; and therefore its economic results will differ from those reflected in the RSA.”
University of Illinois at Chicago Professor Robert Chirinko said, “While it is challenging to grasp all of the details of the settlement on a first reading, one overarching question emerges – why are the bond insurance companies being treated so well?
- First, bonds insured by Assured Guaranty and Assured Guaranty Municipal receive very favorable treatment. Their expected default payouts appear to be circumvented by the issuance of Assured Securitization Bonds, per Recovery Plan Term Sheet, item VII.a.
- Second, why is PREPA paying the costs (fees, underwriter costs, etc.) associated with the issuance of these special securitization bonds benefiting bond insurers?”
AllianceBernstein Credit Analyst John Ceffalio said, “This is a positive step towards resolving Puerto Rico’s bankruptcy and towards providing Puerto Ricans with an efficient, reliable, and clean utility.
“Key long-term risks to the proposed new bonds are population loss and electric customers going off grid, so we want to better understand how bondholders will be protected against those risks," he said. "There is still execution risk because we understand that other creditors like pensioners and the fuel line lenders haven’t yet signed on to the agreement.”
Tom Sanzillo, director of finance at The Institute for Energy Economics and Financial Analysis, criticized the deal as too generous to bondholders: "It is clear from the agreement that bondholders and insurers are protected. Who is responsible for the system being maintained in a state of good repair? It is economic treachery to assume that the payment of upward of $23 billion over the next forty years for a debt obligation that produces nothing for Puerto Rico's economy is part of any workable solution."
