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A Chronicle of Prepa’s RSA Saga

By on July 15, 2017

Editor’s note: This article originally appeared in the July 13, 2017, print edition of Caribbean Business.

There are few things more emblematic of complexities ensnaring Puerto Rico’s debt crisis than the Puerto Rico Electric Power Authority (Prepa)—much as the island itself, the ailing public utility is bankrupt and has numerous creditor constituencies. The restructuring of Prepa’s $9 billion debt was essential for Puerto Rico because it would have provided a showcase for the art of the possible. More importantly, without sealing the restructuring support agreement (RSA) achieved in October 2016, Prepa would not be able to implement an Integrated Resource Plan (IRP) that requires access to capital for the overhaul of an obsolete and bureaucratically bloated public agency.

Time and again, the reform of Puerto Rico’s energy apparatus came to the forefront in public debate over Puerto Rico’s debt crisis—early in Gov. Alejandro García Padilla’s administration when the Energy Relief Act was passed; again, in May 2014 when the former Deputy Managing Director of the International Monetary Fund Anne Krueger pointed to exorbitant electricity costs as a categorical impediment to economic development in Puerto Rico; and later on Capitol Hill when the Prepa RSA was debated in hearing after hearing during the months prior to the passage of the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) in June 2016.

Such was the importance of Prepa’s overhaul that House Natural Resources Committee Chairman Rob Bishop (R-Utah) tried to have his staff director Bill Cooper codify the Prepa deal into the law, but they found opposition from the Dems across the aisle. Then the final draft of the bill came down the pike, language stipulated that all deals done prior to Oct. 18, 2016 would qualify as prearranged protected deals heading down a path to Title VI for consensual negotiations.

The last thing Bishop expected was for the incoming administration of Gov. Ricardo Rosselló to take another crack at the deal and in so doing, toss the protections of the original deal into the trash. In one fell swoop, the Rosselló administration blew to kingdom come a deal four years in the making. Ahead are the defining moments of a Prepa RSA that cost Puerto Rico far too much—about $100 million in legal and financial fees—with far too little to show.

Here we come to save the day (May 2014)

Gov. García Padilla takes office, knowing that credit-rating agencies are bound to downgrade Puerto Rico credit to junk status. At the top of the heap in Puerto Rico’s towering debt is Prepa with a whopping $9 billion debt load. The administration sets out to transform its energy apparatus through Act 57. The bill enables the creation of the Puerto Rico Energy Commission (PREC), which is ultimately tasked as the watchdog of the people, for the people and by the people to throttle the affronts of a utility that behaved as an oligarch gone wild—forgiving public agencies their electric debt and overcharging consumers to cover those costs.

The Energy Relief Act tasked PREC with oversight of Prepa’s functions, “particularly the adoption of energy rates, energy generation and interconnection, compliance with the renewable portfolio standard adopted by Act 82-2010.”

Forbear with me (August 2014)

Led by former Chief Restructuring Officer (CRO) for the U.S. Treasury Jim Millstein, consulting firm FTI and Cleary Gottlieb, Prepa strikes a forbearance agreement with its creditors on debt payment of some $671 million, which was due in August 2014. The deal includes the Ad Hoc creditors, which hold some 40% of Prepa debt, fuel line lenders and bond insurance companies Assured, MBIA’s National and Syncora. The forbearance agreement stipulates the need to hire a CRO to oversee Prepa’s financial and operational overhaul.

In Lisa we trust (September 2014)

Prepa’s governing board appoints Lisa Donahue as CRO in September 2014. The newly appointed official is tasked with overseeing negotiations with the utility’s various creditor constituencies to achieve a sustainable debt-restructuring plan and overhaul the utility. Her first task is to look deep into the entrails of Puerto Rico’s energy beast to draft a five-year business plan by December 2014.

‘Si no me dan de beber, lloro’ (December 2014)

Puerto Rico’s never-ending Navidades arrive and Donahue fails to deliver the business plan because, say some sources with knowledge of negotiations—“there was not enough time granted for the due diligence to put together a solid plan.” Instead, Donahue presents a document that lays out Prepa’s status quo; the disclosure of what could best be described as worst practices is intended to open the eyes of creditors, but fails to impress. Creditors insist on a concrete five-year plan, which Donahue calls a work in progress that will have to wait until March 2015 because an incomplete plan could affect the price of Prepa bonds. Suffice it to say that Prepa bonds did not rally.

Speak softly and carry a big PREC (February 2015)

PREC issues a Feb. 12 order for the establishment of a new rate structure to be delivered for review in July 2015. The Puerto Rico Energy Relief & Transformation Act of 2014 stipulates that the new rates should be in place by mid-July, but will be in effect by mid-September. A tiny nagging impediment in the process, legislation demanding that “the commission shall guarantee that the approved rate will be sufficient to guarantee payment of principal and interest on bonds and other financial obligations,” is a harbinger of doom in negotiations that will manifest itself two years down the road.

I will gladly pay you Tuesday for a utility today (April 2015)

The Prepa Ad Hoc bondholders, composed of investors represented by Oppenheimer Funds, Franklin Templeton and Blue Mountain Capital, make a $2 billion offer to help finance Prepa’s first phase of converting its powerplants from oil to combined cycles using natural gas. Prepa rejects the offer calling it premature and insufficient, based on AlixPartners’ calculations that the utility’s overhaul would cost $4 billion. The offer comes on the heels of a 15-day extension of the forbearance agreement, which was scheduled to expire March 31. In those days, sources close to the negotiations admit it is likely Donahue’s restructuring brigades and Prepa’s creditors would be living “from extension to extension.” How self-prophetic.

An offer you just cannot refuse (May 2015)

Puerto Rico New Generation Partners (PRNGP), a consortium composed of York Capital Management, Transmission giant ITC and NRG Energy, a leading power generation company, make a $3.5 billion offer to overhaul Prepa’s infrastructure. PRNGP proposes to enter into a 30-year power-purchase agreement with Prepa, backed by the Government Development Bank (GDB). Replacing Prepa’s antiquated inefficient oil-fired fleet with state-of-the-art combined-cycle gas-fired units and utility-scale solar units would save the state-owned energy company up to $1.52 billion annually. Prepa rejects the deal as it pushed forward with preparation of its five-year plan that would include requests for proposal (RFP) for competing offers.

The woman with a plan (June 2015)

Donahue makes Prepa’s business plan public in June 2015. The plan details a 15-year capital improvement program of the utility’s powerplants. The report proposed repowering Units 5 and 6 at the Costa Sur powerplant and using diesel fuel for Units 1, 2 and 3 at the Palo Seco powerplant instead of the immediate construction of a natural gas powerplant at Aguirre and Costa Sur.

My name is Bond—Mirror Bond (November 2015)

Donahue’s brigades at AlixPartners strike a restructuring support agreement (RSA) with creditors on Nov. 5, 2015. The deal brings into the fold the Ad Hoc bondholders holding nearly 40% of Prepa bonds, fuel line lenders and the GDB; those holding out include bond insurance companies Assured, MBIA’s National and Syncora, who have billions in Prepa exposure. The RSA contemplates a transition charge to securitize bonds through a special-purpose vehicle that will allow some bondholders to exchange their credits for new bonds at a 15% haircut. The new bonds, however, require an investment-grade rating from the credit-rating agencies. Tough sledding ahead.

Safe to go back in the water? (November 2015)

In testimony before the Puerto Rico Legislature on Nov. 11, Donahue explains how the extensions on the original forbearance agreement that took place through November 2015 had saved the utility $1.3 billion in liquidity relief. She makes an urgent plea for passing the Prepa Revitalization Act, which includes amendments to wrest control of RFPs from PREC. The amendments receive staunch opposition from then-Senate President Eduardo Bhatia, who insists on keeping PREC’s Good Housekeeping seal of approval on all things Prepa.

A deal they cannot refuse (June 2016)

In the run-up to passing Promesa, Rep. Bishop is intensely lobbied by hedge funds, bond insurance companies and other creditors holding Prepa debt to codify the Prepa RSA into the law. Bishop’s Staff Director Cooper attempts to codify the deal into the law with language that would have made the Prepa RSA automatic once Promesa was signed into law by President Obama, but he meets stiff opposition from Dems. When the final bill comes down the pike, the language merely contemplates that all deals signed prior to Oct. 18, 2016 conform as prearranged deals qualifying to enter Title VI for consensual negotiation. What Bishop did not foresee was that a new administration may take another crack at the deal, rendering the old deal null and void.

The monolines join the party (July 2016)

After more than two years and 18 extensions on a forbearance agreement that included relending some $215 million and maturities extended, monocline bond insurance companies Assured, MBIA’s National and Syncora join the Prepa RSA, thus bringing nearly 70% of the utility’s creditors into the fold.

The second coming of Macri (October 2016)

Before the 2016 election, gubernatorial candidate Rosselló pipes in live via Skype during a conference on Puerto Rico debt hosted by the Association of Financial Guaranty Institutions. Heavy hitters in the audience include the CEOs of monoline bond insurance companies, fund managers and financial news outlets. The general impression of those in attendance is that Rosselló could become the poster child for the creditor community. The upstart candidate promises to produce audited financial statements within months of taking office and payment of debt as it comes due—music to their ears.

A last hurrah (February 2017)

The moment the Rosselló administration made public that the Fiscal Agency & Financial Advisory Authority and the government’s lead financial adviser Rothschild & Co. would lead negotiations with Prepa bondholders, observers knew that AlixPartners was finished in its role of leading the utility’s restructuring process. That exit was put on a faster track than expected when a Feb. 1 letter of resignation signed by Prepa CRO Donahue established that the firm she leads would not be submitting a contract extension proposal. Prepa, according to a source, is expected to be run by a full-time CRO with the help of smaller consulting firms that will help out in the operations.

Putting a Denton in the deal (March 2017)

With only months at the helm of Puerto Rico’s government, Rosselló commences to sound the voice of alarm over the potential impact of debt restructuring on essential services—a scenario that he claims to avert at all costs. His concerns over the potential for crushing electricity rates contained in the Prepa RSA are addressed by advisers at Dentons, who take another crack at the Prepa deal to achieve a more stable rate structure in the securitization of a bond exchange mechanism and achieve greater liquidity. Although the Rosselló administration claimed to have achieved a better deal for Puerto Rico, those close to the negotiations know that as it was structured, Puerto Rico was exposed to potentially crushing electricity costs down the road if oil prices spiked and the consumer base continued to shrink.

We can’t go for that—no can do (June 2017)

With a June 29 deadline for certification of the Prepa RSA fast approaching and no movement in the Financial Oversight & Management Board’s (FOMB) bullpen, Republicans on the Hill begin to get antsy. The first sign of the board’s reluctance to certify came in veiled statements by FOMB Executive Director Natalie Jaresko during board hearings held at El Conquistador Resort in Fajardo. As word of the board’s resistance grows—Andrew Biggs, David Skeel, Ana Matosantos and Arthur González were particularly vocal—Republican leadership sounds the alarm in a missive from Bishop that fails to persuade the FOMB. Just before the stroke of midnight on June 27, the board makes public its refusal to certify the Prepa RSA under Title VI of Promesa. The utility’s debt is filed under Title III for bankruptcy proceedings. All told, Prepa’s negotiations cost Puerto Rico about $100 million.

With Prepa Filing for Title III, Privatization Looming

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