Congress to review PREPA debt restructuring deal

Written by  //  March 22, 2017  //  Government  //  No comments

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PREPA has been negotiating with its creditors since December 2015. (Credit: © Mauricio Pascual)

The Congressional Subcommittee on Indian, Insular and Alaska Native Affairs will hold a hearing today on the status of the Puerto Rico Electric Power Authority Restructuring Support Agreement, which is set to expire Mar. 31.

The hearing will be split into two panels, during which witnesses will discuss the status of the RSA and negotiations between the government and PREPA bondholders.

Puerto Rico Gov. Ricardo Rosselló heads the witness list that also includes: Gerardo Portela-Franco, executive director of the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF); José B. Carrión III, chairman of the Financial Oversight and Management Board of Puerto Rico; Luis Benítez-Hernández, chairman of the PREPA Governing Board; Stephen Spencer, managing director of Houlihan Lokey on behalf of PREPA creditors Franklin Advisers Inc. and OppenheimerFunds Inc.; Adam Bergonzi, managing director & chief risk officer of the National Public Finance Guarantee Corp.; Rob Bryngelson, president of Excelerate Energy L.P.; and Ana J. Matosantos, Oversight Board member.

Lawmakers will discuss a number of issues, including PREPA’s level of debt, which sits at roughly $8.9 billion spread across four classes: uninsured legacy bonds ($5.6 billion), insured legacy bonds ($2.1 billion), relending bonds ($0.4 billion), and bank debt ($0.7 billion).

Over the course of negotiations between PREPA’s management and its creditors, the RSA has been extended 15 times since terms were first agreed to in December 2015.

“The PREPA RSA will help address how the utility will be able to meet its debt obligations by lowering the overall debt burden, lowering total debt service, providing a five-year period of principal relief, and allowing for reinvestment in PREPA’s aging infrastructure,” the subcommittee outlined in its pre-hearing memo.

“The PREPA RSA requires certain structural reforms within PREPA that are vital for the utility to begin de-politicizing rate structures in order to operate efficiently and provide stable, consistent and affordable power generation,” the memo further noted.

PREPA has a major bond payment of roughly $455 million of combined principal and interest — split between $237 million of principal, $218 million of interest — due on July 1, 2017.

“Without the cash flow relief provided by the terms of the RSA and without any other viable options for making such a payment afforded to the distressed utility, PREPA will once again default and residents of the island may experience interruptions in services,” lawmakers stated.

The basics of the PREPA RSA contemplate a consensual exchange of roughly $5.6 billion in uninsured legacy power revenue bonds for $4.8 billion in securitization bond debt.

This equates to about a 15 percent haircut for creditors in exchange for more secure bonds backed by a 3-cent per kilowatt-hour transition charge that will be covered by PREPA’s consumers.

Also included in the details of the RSA is a five-year period of principal relief that will allow PREPA to direct funds that would otherwise be used for debt service toward investing and updating their aging infrastructure.

“This is critically important given the recent episodes involving severe failures in PREPA’s outdated and unmaintained system which has resulted in massive power outages for the residents of the island,” the subcommittee concluded.

Government seeks ‘better deal’
Since taking office in January, Gov. Rosselló’s administration has said it requires time to review the RSA, which is being done by advisors at AAFAF. The government is looking to negotiate a better deal within the existing framework.

“AAFAF’s proposal to certain of PREPA’s creditors was disclosed publicly earlier today based on executed confidentiality agreements with certain of PREPA’s creditors,” the agency said in a statement released Tuesday.

“These discussions are ongoing and AAFAF remains committed to a good faith negotiation with PREPA’s creditors in order to consensually achieve important improvements to the RSA,” the AAFAF statement noted. “We’re hopeful that the multiple creditor constituencies will approach this important matter with similar dedication.

Meanwhile, the Ad Hoc PREPA Bondholder Group responded by saying “the proposal released [Tuesday] would not simply modify the existing restructuring support agreement (RSA) — rather, 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.”

“We have worked for almost three years to support PREPA and the RSA, and the deal has already enabled PREPA to pass along more than $2 billion of fuel cost savings to customers. Under the agreement, bondholders ultimately accepted a 15 percent principal haircut, a five-year holiday on principal payments, and a 20% interest rate cut — which would reduce debt service in the first decade by over $1 billion,” the bondholders stated.

“Notably, this deal was supported by both the Puerto Rico legislature and the passage of PROMESA, which specifically promoted preexisting voluntary agreements like the PREPA deal, and 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,” the group said.

The group said to be “open to constructive, reasonable discussions with the governor and his administration to execute a workable deal in the best interests of Puerto Rico and the people of the Commonwealth. 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.”

Private sector: RSA ‘punitive proposition’
In a letter sent to the Congressional subcommittee ahead of the hearing, a group of 10 private-sector trade groups said the RSA under consideration is “a punitive proposition for consumers and electricity ratepayers who will suffer higher rates under this agreement which preserves the government run PREPA monopoly while locking out private sector and alternative energy competition.”

“Even bondholders who will see the Puerto Rico electrical system unravel as Puerto Rico ratepayers are unable to comply with such costly requirements. The end result of these high electricity costs will be an even weaker economy, greater population losses, and less new investment in job creation,” the group said.

“The RSA is a bad deal for all parties involved and should be unacceptable to Congress,” said the letter representing the Puerto Rico Manufacturers Association (PRMA); Puerto Rico Restaurants Association (ASORE); United Retailers Center of Puerto Rico; Puerto Rico Hospitals Association; Chamber of Marketing, Industry and Food Distribution (MIDA); Puerto Rico Builders Association; Association of Consultants and Contractors of Renewable Energy of Puerto Rico (ACONER); Puerto Rico Products Association; Puerto Rico Hotel & Tourism Association; and the Puerto Rico Institute for Competitiveness and Economic Sustainability.

“We realize there are those who wish to rush the implementation of this flawed RSA agreement, but we argue that everyone should be treated equally under implementation of the Puerto Rico Oversight, Management and Economic Stability Act,” the group further stated.

“Nonetheless, we argue that the Congressionally created Oversight Board treat all U.S. citizens equally under the application of its responsibilities. All parties if committed can quickly work to reconstruct a responsible agreement, which applies the recently enacted Fiscal Plan for Puerto Rico and provide both fairness and an opportunity to revitalize our local economy,” the group added.

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