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Debt Restructuring

PREPA and Creditors Reach Preliminary Agreement

The Puerto Rico Electric Power Authority (PREPA) was the first, and so far the only, government agency in Puerto Rico to negotiate a debt restructuring deal. In December 2015, prior to the creation of the Financial Oversight Board, PREPA negotiated a voluntary agreement with creditors. PREPA is currently responsible for approximately $9 billion of Puerto Rico’s $72 billion in debt. The proposed deal had creditors accepting an alleged 15% reduction in payment in exchange for higher-rated bonds backed by a higher charge on customer bills. However, newly-elected Governor Rosselló called for reopening talks and altering the PREPA agreement of the prior administration in order to reduce the transfer of costs to consumers.   

In addition to its substantial debt, PREPA has several structural issues. Its outdated and inefficient fossil fuel-based generation system is not in compliance with federal air quality regulations. This has left Puerto Ricans with some of the highest electricity rates in the United States.

  1. Debt Restructuring & the RSA

In January 2016, PREPA reached a Restructuring Support Agreement (RSA) with some of its Creditors. However, talks to amend this agreement began with new Governor Rosselló. The Government announced on April 6th that PREPA and its creditors had reached a preliminary understanding regarding changes to the Restructuring Support Agreement.[1] This new agreement would increase the moratorium on the payment of the debt’s principal from five to eight years and maintain the reduction on that obligation at 15%.

The proposed amendment to the RSA establishes the creation of new securitization bonds that mature in 2047. Bondholders will take a 15% repayment cuts in exchange for these new bonds. “Mirror Bonds” will be issued that bear the same principal, interest rate and mature on the same schedule as the utility's outstanding insured obligations and legacy bonds. Bondholders will commit to purchasing $111 million of the new PREPA bonds. Additionally, the proposal maintains a request for $300 million in deferral of the principal for the first six years.

This new agreement has yet to be certified by the Oversight Board. While PROMESA states that preexisting agreements with debtors shall be deemed to be in conformance with the requirements of subsection (i) of S.2328.[2] This section applies to PREPA’s original Restructuring Support Agreement, which was signed before May 18, 2016. However, amendments to this voluntary agreement will require Oversight Board certification.                                                                                                                                           

Overview of Proposed Amendment to Restructuring Support Agreement (as of April 6, 2017)

  • New Securitization Bonds
    • Bond insurers, including MBIA Inc (MBI.N) and Assured Guaranty (AGO.N), to fund a surety to protect against defaults
    • New Securitization Bonds will be issued in exchange of legacy bonds
    • “Mirror Bonds” will be issued, these bear the same principal, interest rate and mature on the same schedule as the utility's outstanding insured obligations and legacy bonds
    • Bondholders commit to purchasing $111 million of the new PREPA bonds that will earn 10% interest.
  • Relending Bonds
    • Bondholders will take a 15% repayment cuts in exchange for the new bonds, maturing in 2047
  • Principal payment deferrals
    • $300 million in additional deferral of principal in the first six years

II. Impact of New RSA & Future Viability

Governor Rosselló has stated that this revised agreement would result in a reduction, an estimated 36% between 2018 and 2022, in the transition charge for PREPA customers.The US$0.0310 cents per kilowatt hour (kWh) approved by the Puerto Rico Energy Commission (PREC) would now be of $0.0198 cents per kWh. However, this transition charge still entails an increase in the electricity rate in order to pay bondholders.

While the amended RSA has postponed payments, no major change to the principal or interest rate have been made. This has limited the utility’s potential for economic growth and lower electricity rate. The Government’s fiscal plan establishes the creation of public-private partnerships, 43% of which are energy related, as a strategy for economic growth. However, the current debt deal might not allow adequate funding for infrastructure improvements and innovation. 

PREPA is under a mandate to make investments in modernizing its outdated electric system. Currently, it’s primarily dependent on oil-based power generators.  The current administration plans to turn towards natural gas through a $2.4 billion investment but continues a pattern of over-reliance on one source of fuel, despite a legislative mandate to diversity Puerto Rico’s energy mix. This combined with the current debt obligation will limit any possible investments in renewable energy. Furthermore, recent projections by the Oversight Board show that current revenue streams allow for payment of approximately 25% of existing bond obligations. Ratepayers cannot afford a higher debt burden. However, the PREPA agreement does not reflect this. Projections also fail to take into account ratepayer’s ability to pay an already high electricity cost for an outdated and faulty system. Optimistic projections have placed additional stress on the utility to produce new revenues, through higher rates, and will ultimately limit future investments needed to update its aging infrastructure. 

[1] Puerto Rico Fiscal Agency and Financial Advisory Authority “PREPA Public Disclosure” https://emma.msrb.org/ER1046043-ER819555-ER1220619.pdf April 6, 2017

[2] 48 USC 2124. (i)(3)

Kathya Severino Pietri
Wednesday, April 26, 2017 - 11:15am