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Credit-Rating Agencies Decline Investment Grade for Prepa Bonds

By on July 21, 2016

U.S. credit-rating agencies have declined to give the Puerto Rico Electric Power Authority’s (Prepa) Restructuring Bonds a high credit rating, as was agreed to in the deal to restructure the utility’s $9 billion debt, which may force Prepa to renegotiate the agreement.

Earlier this year, Prepa and about 70% of its bondholders reached a deal in which creditors agreed to a 15% cut in repayments in exchange for newer bonds with higher ratings. To ensure those ratings, Prepa agreed to create an extra charge, also known as a transition charge, on customers’ bills to pay for the new bonds. The Puerto Rico Energy Commission recently approved the transition charge and an adjustment mechanism to pay for the new bonds.

As previously reported by Caribbean Business (Feb. 26, 2016), Prepa’s restructuring agreement must comply with several important requirements before becoming reality. For example, the initial issuance of Restructuring Bonds must receive an investment-grade rating from any rating agency that rates the Restructuring Bonds.

TOP 21Prepa must also diligently pursue ratings from Moody’s Investors Service and Standard & Poor’s, according to the Restructuring Support Agreement (RSA) enabled by the new law.

Therefore, the three main conditions of the restructuring deal—which was extended to December 2016—called for a hike in Prepa rates, the enactment of the Prepa Revitalization Act that created Prepa’s Revitalization Corp. to issue the new bonds and for those new bonds to obtain an investment grade.

“To that effect, Prepa hired Standard & Poor’s, at a cost of $365,000, for a study to determine how it can achieve an investment grade on the new bonds. In the contract, S&P did not commit itself to give the new bonds a high classification. Right now, all the credit-rating agencies declined to give the [new] bonds an investment grade,” said Carlos Gallisá, one of the two consumer representatives on Prepa’s board.

“Since that did not happen, Prepa must go back to the negotiating table with bondholders,” he added.
Prepa Chief Restructuring Officer Lisa Donahue informed the board at a meeting last week that the credit-rating agencies are refusing to give the restructuring bonds an investment grade, another source said.

The Puerto Rico Revitalization Corp. was planning to engage in a bond exchange this year after adopting a resolution approving the issuance on June 28, a few days after the Energy Commission approved the transition charge. The resolution also approves the restructuring costs and the restructuring property.

While the board believes bondholders will agree to renegotiate because the new bonds are guaranteed by the transition charge, the outlook appears grim. Before any future issuance of Restructuring Bonds or incurrence of any other indebtedness or guarantee of indebtedness by the corporation, it “must provide the Trustee confirmation that each rating agency that maintains a rating on the Restructuring Bonds outstanding at that time has confirmed the proposed action will not result in a suspension, reduction or withdrawal of the then-current rating by such rating agency or agencies, and that at least one rating agency will maintain the same or higher rating as it originally assigned to the initial series of Restructuring Bonds,” the deal said. “If the bondholders declined to renegotiate, the deal is off,” Gallisá said.

The credit-rating agencies’ refusal to grant an investment grade to Prepa was expected. Earlier this month, S&P further downgraded Prepa’s current bonds. Economist Vicente Feliciano predicted such an outcome would happen and has called for Prepa to renegotiate its restructuring agreement, contending it is a bad deal for the island.

Besides the transition charge, Prepa has requested a rate hike that combined will result in an increase of more than 20% in customers’ utility bills.

La Fortaleza has list of new Prepa board members

Caribbean Business also learned that La Fortaleza has the list of new Prepa board members who will be appointed and the announcement will be made next month.

Sources said Gov. Alejandro García Padilla may convene two special sessions of the Legislature, with the second to confirm the new board members.
Gallisá alleged that all board members slated to be appointed are from outside Puerto Rico. “The only ones who will be left are those who represent consumers,” he said.

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