The expiration of the Puerto Rico Electric Power Authority’s contract with the firm leading the utility’s restructuring efforts has increased uncertainty for bondholders, Moody’s Investors Service said in an analysis released Monday.
However, the ratings agency believes “a consensual restructuring still appears to be the most likely outcome.” It had predicted as much several weeks ago, as this media outlet reported.
PREPA’s contract with AlixPartners, which had been heading up the restructuring efforts for the utility and its creditors, expired on Feb. 15, without an extension. The expiration was coupled with the resignation of the company’s chief restructuring officer, Lisa Donahue.
“We view these developments as credit negative for PREPA. The absence of a restructuring firm focused on PREPA creates a leadership vacuum following two years of negotiations that enabled the utility to reach a broad agreement with bondholders on a restructuring plan and make operational changes that improved the utility’s efficiency and lowered its costs,” Moody’s said.
However, the ratings agency said the developments “are not entirely unexpected.”
The Fiscal Agency and Financial Advisory Authority had been authorized by the Commonwealth to lead negotiations with PREPA’s creditors, in response to a decision by new Gov. Ricardo Rosselló.
However, FAFAA and its new advisor, Rothschild & Co and Dentons, “have a lot on their plates with a much broader mandate, because they are also advisors to the Commonwealth as well as to other Puerto Rican government entities,” Moody’s noted.
“That said, the heavy lifting in terms of organizational and operational changes at the utility has been done. Although additional work remains, an operational and organizational roadmap has been established,” the agency noted.
In the meantime, FAFAA, its advisors and Rosselló’s staff have been evaluating the Restructuring Support Agreement, which expires March 31, along with PREPA’s resource plans and other pertinent documents.
“We understand that an objective of the current administration is to utilize PREPA in a way that enhances economic development for the Commonwealth. For this reason, we continue to believe that a consensual agreement with bondholders and creditors remains the most likely outcome, because such a transaction would help facilitate the Commonwealth’s economic development,” Moody’s said in its analysis.
“This suggests that the RSA can still be executed in a form that is largely consistent with its current structure,” it added.
Moody’s noted that other developments also lend support to a consensual restructuring, including the approval of a final base-rate increase, the withdrawal of several lawsuits and the continued ability of parties to extend the expiration date of the RSA.
“That said, we note that this progress was made while PREPA had a dedicated restructuring firm. Without one, execution risk, which was already elevated, has notched up even further, particularly given the challenging economic environment within the Commonwealth,” Moody’s concluded.