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Bondholders reject government terms for new Prepa deal

By on March 21, 2017

SAN JUAN – The Puerto Rico Fiscal Agency and Financial Advisory Authority (FAFAA) filed on Tuesday at the Municipal Securities Rulemaking Board its proposed terms for a new restructuring support agreement (RSA) with Puerto Rico Electric Power Authority (Prepa) bondholders.

However, Prepa’s Ad Hoc Group of Bondholders issued a statement rejecting it. The filing takes place hours before a U.S. congressional subcommittee is slated to hold a hearing on the RSA.

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

Prepa and FAFAA have confidentiality agreements with certain creditors of the Ad Hoc Group of Bondholders under which it was agreed to publicly disclose certain confidential information, the filing says. The document appears to have been prepared by Rothschild, the firm that is advising FAFAA during the negotiations.

aee, prepa

Main entrance to the Puerto Rico Electric Power Authority in Santurce, San Juan. (File Photo)

The current RSA, which expires March 31, calls for a 15% haircut on the principal of the debt, which is around $9 billion. But the government is proposing a split between 80% in securitization bonds and 5% in new Prepa bonds to maintain 85% of the total debt.

While the current RSA proposes a debt service reserve fund of 10%, the government is proposing a reserve fund ramp up to 3.5% by year five.

The current RSA calls for a bond exchange in which current Prepa bonds will be exchanged with bonds from Prepa’s Revitalization Corp. Those new bonds are required to be of  investment-grade credit quality. The government now says these shouldn’t need to be an investment-grade requirement for securitization.

Under the current RSA, bondholders can elect between two types of bonds, whose terms were proposed to be amended to, among other things, extend their maturity to 2047.

The Ad Hoc group issued a statement saying the proposal would not simply modify the existing RSA but “fundamentally change it and undermine the value and structural integrity of the new Prepa securitization debt.”

Private Sector Asks Congress to Reject Prepa Agreement

“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% principal haircut, a 5-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 group said.

The bondholders said the deal was supported by the government. “Furthermore, this deal provides the surest route back to the capital markets for Puerto Rico and should not be put at risk. We remain open to constructive, reasonable discussions with the Governor and his Administration in order 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,” they stated.

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