A deal on the Puerto Rico Aqueduct and Sewer Authority’s federal debt is both positive and negative for the authority’s bondholders, an analyst said.
The deal will reduce the authority’s debt service by $380 million over the next 10 years. It will eliminate Puerto Rico’s central government guarantee of this debt. It will elevate the newly restructured debt to make it “Senior Indebtedness” under the Master Agreement of Trust.
Puerto Rico’s Fiscal Agency and Financial Advisory Authority announced the deal Friday evening. The Puerto Rico Oversight Board approved the deal.
The deal addresses three different forms of non-bond debt. One is $403 million of Rural Utilities Services debt associated with the United States Department of Agriculture. Another is $193 million of debt in the Drinking Water State Revolving Fund Program associated with Puerto Rico Infrastructure Financing Authority, Puerto Rico Department of Health, and the U.S. Environmental Protection Agency. The third is $403 million of debt associated with PRIFA, the Puerto Rico Department of Natural and Environmental Resources, and the EPA.
PRASA has been in default on these loans for years, said Matt Fabian, partner at Municipal Market Analytics.
Though the debt will be made “senior” equal to senior bonds, the senior debt service reserve account shall only secure the authority’s bonds.
In some ways the deal is step backward for bondholders in so far as it elevates the federal debt to the same level as the bond debt, Fabian said.
However, some bondholders may welcome it as a step in the right direction by bringing the restructuring of PRASA’s bonds closer, Fabian said. For many Puerto Rico bondholders, advancing the day when they can sell their newly restructured bonds is an important goal, he said. There has been an active audience for buying restructured Puerto Rico bonds.
FAFAA Executive Director Omar Marrero said: “The agreements set PRASA on a clear path to credit rehabilitation that will allow it to regain municipal market access in the near term for future capital investments.”
FAFAA said that the deal allows PRASA to gain access to potential sources of funds under federal programs for infrastructure.
In late 2018 the Oversight Board said it might put PRASA into a bankruptcy process found in the Puerto Rico Oversight, Management, and Economic Stability Act this summer. Since then, negotiations have gone on with administrators of the federal debt and possibly with bondholders as well.
As of July 1, 2018, PRASA had $4.61 billion in debt. Of that, about $3.45 billion was bond debt due to investors.
The PRASA fiscal plan released in June indicated that the authority would pay 93.7% of the bond debt service it had originally committed to paying from fiscal 2019 through fiscal 2024.
