WASHINGTON – Puerto Rico Electric Power Authority creditors warned U.S. legislators on Wednesday that Gov. Ricardo Rossell-'s bid to renegotiate PREPA's restructuring support agreement so close to its expiration date could adversely impact distressed credits in the municipal bond market such as the state of Illinois, Chicago and the U.S. Virgin Islands.
Stephen Spencer, managing director of the investment banking firm Houlihan Lokey that represents Franklin Advisors and OppenheimerFunds, said the Rossell- administration's attempt to revisit and revise the RSA before it expires on March 31 could widen the spreads for distressed credits. Spencer made his comments during a hearing held by the House Natural Resources Committee's Subcommittee on Indian, Insular, and Alaska Native Affairs.
"I advised the largest creditor in the city of Detroit's bankruptcy. We saw a negative impact in terms of a widening of spreads on Chicago bonds" after the Detroit restructuring plan was revealed, Spencer said. "This type of deal alone will be the single largest municipal restructuring deal ever. If it goes badly, it will have an impact on municipal issuers at the lower end of the credit spectrum in the municipal capital markets."
Spencer added that a failure to close the deal would call into question Puerto Rico's good faith in negotiating other restructurings and would damage, if not destroy, the territory's ability to use securitization as a tool to restructure its other authorities that are mired in debt.
"The deal puts PREPA on a sound financial footing, but without it, PREPA is approaching imminent default and a liquidity crisis that could turn off the lights with the next operational hiccup or major storm," Spencer said.
Adam Bergonzi, managing director and chief risk officer with National Public Finance Guarantee, similarly warned that a termination of the RSA would likely lead PREPA to default on its more than $450 million bond payment due July 1 and result in bondholder litigation.
He added that Puerto Rico also risks losing credibility with investors, and therefore renewed access to the capital markets "if the RSA falls prey to the vagaries of local politics or to a change of administration."
Rossell-, in response to a question from Rep. Rob Bishop, R-Utah, about the possibility of extending the March 31 expiration date, noted that the deadline has been extended in the past and that he is confident it can be again. However, he added that his administration will still be working within the short timeline between now and March 31 to talk with creditors about changes to the RSA.
PREPA, the primary power utility in the territory, currently has roughly $8.9 billion in debt. The RSA is meant to help PREPA address its debt obligations by lowering its overall debt burden and total debt service as well as by providing a five-year period during which the agency will not have to pay principal and can use the savings to invest in updated infrastructure. In its current form, the RSA would have creditors exchange roughly $5.6 billion in uninsured legacy power revenue bonds for $4.8 billion in securitized bond debt, a 15% haircut.
The RSA has been extended 15 times since terms were first agreed to in December 2015.
Puerto Rico's former Gov. Alejandro García Padilla appointed new members to the PREPA governing board in November 2016 in an effort to depoliticize the board. The new board reviewed and approved the PREPA RSA in January and is continuing negotiations with creditors on finalizing the agreement. However, Rossell-'s administration has shifted the work of negotiating the RSA with the creditor community to the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF) from the PREPA governing board.
The Puerto Rican government released a proposed revised agreement on Tuesday that would reduce debt service reserves and lengthen maturities. Bondholders criticized the proposal because they said it would fundamentally change the terms of the deal. The creditors have said they would be open to some negotiation on the RSA but have made clear they will not accept major changes.
Rossell-, speaking alone on the first of two panels during the hearing, laid out a number of concerns he had with the current version of the RSA, including: the impact on ratepayers; the effect the RSA may have on the capital and liquidity available to PREPA to improve its operations; the failure of certain creditor groups to provide significant concessions; and that the RSA would not be sustainable for bondholders.
Two members of the Puerto Rico oversight board created by PROMESA spoke on the hearing's second panel and told legislators that they support Rossell-'s goals with the RSA renegotiation, but must wait until they are presented with a final agreement before making a definitive evaluation.
Rossell- drew parallels between his work on his board-approved fiscal plan for Puerto Rico, where he got an extension from the board to create his own version after taking office, and the RSA.
"We were able to achieve what many thought impossible, a fiscal plan that was comprehensive, thoughtful, addressed fiscal and economic concerns, and the well-being of the people of Puerto Rico," Rossell- said. "Now, we aim to do the same with the RSA."
Subcommittee chair Doug LaMalfa, R-Calif., pressed Rossell- on the amount of time it has taken to negotiate the RSA and asked whether he thought it is "worth the delay" that he is causing by wanting to renegotiate.
"We understand that there has been a lot of time, a lot of discussion prior to our administration" Rossell- said. "What I can assure you is we are fully committed to having these discussions, these conversations so we can actually have a plan that provides affordable rates for the people of Puerto Rico ... that allows for economic growth for Puerto Rico and is actually sustainable."
Both Spencer and Bergonzi said that Wednesday was the first time they had heard Rossell- speak about the proposal to reform the deal and denied that this administration had reached out to them in the past.
"We have had no positive engagement from this administration," Bergonzi said.
Rep. Darren Soto, D-Fla., suggested that if the parties are unable to come to an agreement by the deadline, the committee consider whether to amend PROMESA to include PREPA negotiations, which were not included because they were ongoing at the time PROMESA was passed.
Jenniffer González, Puerto Rico's non-voting member of the House, asked both Spencer and Bergonzi whether they are willing to sit down with the Rossell- administration to talk about the RSA. Both Bergonzi and Spencer said they would, but Spencer said that "if we're going to re-trade the deal, that leaves us in a very awkward position."
Discussion strayed away from the RSA at several points during the hearing when legislators asked questions of the oversight board members and others about other aspects of Puerto Rico's fiscal crisis and the recently approved fiscal plan.
Rep. Norma Torres, the subcommittee's top Democrat, said she doesn't believe PROMESA did enough for the territory, adding that Congress must step up and assist the island further, particularly with healthcare and job issues. Both Rossell- and the oversight board members assured the California Democrat that they were taking necessary steps to combat those issues.
Rossell- and González held a separate press conference after the subcommittee hearing urging Congress to address the impending "Medicaid Cliff" for Puerto Rico. The territory is in line to experience a drop of roughly $1 billion in healthcare funding over the next year as it loses access to Affordable Care Act funding.
"We are here to alert Congress about this important issue that is challenging not only to Puerto Rico, but sure to have significant fallout on the federal government and many states on the mainland," Rossell- said.
