Fitch: PREPA reform ‘still probable’ despite forbearance
Credit ratings agency Fitch said Tuesday it believes that a restructuring of Puerto Rico Electric Power Authority’s debt obligations remains likely, despite the forbearance agreements between PREPA and certain of its creditors (including bondholders) signed on Aug. 14.
That’s so because the deals provide only temporary relief related to PREPA’s maturing bank lines of credit.
“The underlying terms provide minimal comfort that long-term financial compliance is sustainable. They also do little to address Fitch’s longer-term rating concerns that PREPA’s net cash receipts and existing funds on hand remain insufficient to meet ongoing working capital, debt service and other funding requirements,” the ratings agency said.
“The forbearance agreements fundamentally provide the collective consent of PREPA’s principal creditors not to exercise any rights or remedies arising by reason of potential default under their respective agreements through March 31, 2015, and allow time for additional negotiations,” it further noted.
The maturity date on PREPA’s existing $696 million of bank loans has been extended to March 31, 2015, from Aug. 14, 2014. The principal lending banks — including Citibank N.A. and Scotiabank de Puerto Rico — are to receive only interest payments on outstanding loans during the forbearance period, while bondholders are to be paid scheduled debt service, including payments due Jan. 1, 2015.
Pursuant to the forbearance agreement with GDB, PREPA shall have no obligation to pay any principal or interest due under smaller borrowing agreements with the GDB during the forbearance period.
“Certain provisions of the agreements appear designed to enhance PREPA’s ability to meet near-term operating expenses and provide greater lender oversight of operations. These include requirements for detailed cash flow reporting and forecasting, relief from sinking fund requirements, relief from the aforementioned GDB payment obligations, and permitted access to construction funds for the payment of operating expenses,” Fitch said.
However, other provisions including the required submission of a restructuring plan by March 2, 2015, retention of a chief restructuring officer and the contemplated use of reserve funds for debt service payments suggest, in Fitch’s view, that a financial restructuring remains probable.
The agency noted that PREPA remains plagued by weak financial performance in recent years, including through fiscal 2014. For the 12 months ended June 30, 2014 PREPA reported earnings before interest and depreciation of $781 million and a net loss of $267 million.
The net loss was well above PREPA’s budgeted loss of $161 million. Poor performance for the fiscal year was further characterized by declining energy sales (3.6 percent in fiscal 2014), declining customers (1.5 percent), high concentrations of accounts receivable (25 percent of revenue), high fuel costs (14.99 cents/kWh) and an unwillingness to increase base electric rates, the agency noted.
Fitch downgraded the rating on PREPA’s net revenue bonds to ‘CC’ from ‘BB’ on June 26, 2014 to reflect its view of a probable restructuring following introduction of the Puerto Rico Public Corporation Debt Enforcement and Recovery Act.
GDB outlines scope of CRO Authority
On Tuesday, the Government Development Bank for Puerto Rico disclosed the duties of the so-called chief restructuring officer who has been designated to work alongside PREPA’s executive director to develop, organize and manage a financial and operational restructuring of the company on terms to be approved by the Board.
The GDB noted that the CRO will perform the following duties:
- Provide overall leadership of the restructuring process.
- Serve as the primary point of contact on behalf of PREPA in communications and negotiations with PREPA’s creditors.
- Provide expert testimony with respect to any case filed by PREPA under provisions of Chapter 2 and/or Chapter 3 of the Puerto Rico Public Corporation Debt Enforcement and Recovery Act.
- Serve on and participate in the Integrated Resource Plan (“IRP”) committee.
- Lead PREPA’s process to develop a comprehensive business plan, which will serve as the underpinning for the overall Restructuring.
- Work alongside PREPA’s executive director to improve PREPA’s worker protection and safety record.
- Work alongside PREPA’s CFO to lead the efforts for any revenue improvement and cost reduction plans that are necessary or appropriate for the implementation of the business plan.
- Work alongside PREPA’s CFO to oversee and implement cash and liquidity management/preservation activities.
- Work alongside PREPA’s executive director to improve analysis, tracking and collection efforts and related processes for accounts receivables.
- Work alongside the executive director to review, refine and implement improvements to PREPA’s capital expenditure plan, including the timing and amount of capital expenditures.
- Work alongside the executive director to develop generation, transmission, distribution and other operational improvements.
- Attend and participate in all meetings of the Board.
- Subject to the approval of the Board and executive director, appoint additional officers that report to the CRO, with responsibilities for specific operational and financial aspects of the restructuring.