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Collapse of Prepa Restructuring Agreement a Negative for Puerto Rico Banks

By on January 26, 2016

KBW: Creditors Could Request a Receiver if Prepa Defaults

With the Restructuring Support Agreement (RSA) between the Puerto Rico Electric Power Authority (Prepa) and several groups of creditors (including Puerto Rico banks, the monoline bond insurers and the Ad Hoc Group) falling through last Friday, the news wasn’t a good one for financial institutions with Prepa exposure such as Popular, First BanCorp (FirstBank) and OFG Bancorp (Oriental).

The deadline included in the RSA for passage of the Revitalization Act was Jan. 22, but the Puerto Rico Legislature missed the deadline, as some lawmakers have called for amendments to the bill.

The creditor group had agreed to lend Prepa $115 million if the Legislature passed the measure to restructure the ailing public corporation. At the close of trading Jan. 22, shares of Popular, First BanCorp and OFG Bancorp had lost 17.4%, 29.2% and 24.8%, respectively, since the start of the year. On Jan. 25, First BanCorp established a new 52-week low of $2.13 during intraday trading, upon falling another 6%.

One deal collapses, another extended
On Jan. 24, Prepa announced that several other creditors, including fuel-line lenders Oriental, Scotiabank and the Government Development Bank (GDB), had agreed to extend their forbearance agreements until Feb. 12. Under the RSA, Oriental’s loan to Prepa would be extended for six years at a reduced interest rate, with no loss of principal to Oriental.

Keefe, Bruyette & Woods (KBW) Financial Analyst Bose George noted, while the breakdown in the negotiations is a clear negative, the preliminary agreement highlighted there is a way to restructure Prepa that involves a reasonable creditor haircut and rate increase assumptions.

“We think [the preliminary agreement] sets a good precedent for potential future restructuring discussions,” George said in KBW’s latest equity research.

Pointing out that bank stocks involved in the fuel line could be weak on the news of the RSA’s collapse, George said there is headline risk to the banks, although their exposures are either minor or have large reserves booked.

As of the third quarter of 2015, George said Popular, First BanCorp and OFG Bancorp have classified their Prepa exposures as nonaccrual loans and have recorded reserves of $30 million, $11 million and $24 million, respectively.

Bank of Nova Scotia (Scotiabank) has a $200 million exposure as the lead bank in the Prepa syndicate, the KBW financial analyst noted.

Future creditor actions
While it is unclear what steps creditors may take, George said actions they could pursue include requesting a receiver be appointed if Prepa defaults. If default occurs (or has occurred), any bondholder can petition the courts to appoint a receiver, he said.

“If the bondholder holds greater than 25% of outstanding principal, the court must appoint a receiver, who will then take over the management of Prepa from its existing managers,” George warned.

However, several other scenarios could play out. These include resuming restructuring negotiations or a possible restructuring under Chapter 9 of the U.S. Bankruptcy Code, if that is provided by Congress.

“The now-expired preliminary agreement provides a solid off-the-shelf framework,” George said.

 

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