Higher Rates Possible Without Investment Grade In Prepa Bond Exchange

SAN JUAN – If the proposed securitization of Puerto Rico Electric Power Authority (Prepa) bonds is done over the summer with no initial minimum rating threshold or investment grade, they will have a higher interest rate, which could result in higher power rates for consumers.

The Restructuring Support Agreement (RSA) that Prepa negotiated with 70% of its creditors that resulted in a 15% haircut for some bondholders, or restructuring of $9 billion in debt, calls for an exchange of Prepa’s current bonds, a transaction that will be done by the Prepa Revitalization Corp. over the summer.

As a condition for the securitization, Prepa’s Ad Hoc bondholders said Prepa Revitalization Corp. bonds must receive an investment-grade rating prior to the closing of the restructuring transaction. An investment grade is a rating that indicates that a bond is at low risk of default. The island’s credit ratings are below investment grade, or junk status.

“Both sides had agreed to a Triple-B rating but right now, it is impossible for Prepa Revitalization Corp. bonds to get an investment grade because of all the government defaults,” said a source with inside knowledge of Prepa’s dealings.

AlixPartners, the firm hired to negotiate with creditors and whose contract expired in early February, and Prepa convinced creditors to allow the securitization to move forward with no initial minimum threshold.

The bonds will be paid up with a 3.1¢ per kilowatt-hour transition charge to consumers. That is separate from the actual power rate. The transition charge, however, is subject to an adjustment mechanism that will cause the charge to go up or down as needed.

“It [the transition charge] could impact consumer ratings,” Prepa’s source said.

However, with the securitization, all of Prepa’s debt will pass to the Prepa Revitalization Corp., which could give the utility a clean slate. The current fiscal plan submitted by Prepa, which was approved by Prepa’s board, calls for the utility to use Promesa, the Puerto Rico Oversight, Management & Economic Stability Act, to bind all the creditors —and not just 70%—to the agreement.

Entrance to the Puerto Rico Electric Power Authority in San Juan. (Yoel Parrilla/CB)

Nonetheless, after the departure of AlixPartners, negotiations were taken over by the Puerto Rico Fiscal Agency & Financial Advisory Authority (FAFAA), whose officials have said they will be seeking additional debt relief from Prepa’s creditors.

Luis Santini Gaudier, one of Prepa’s consumer board representatives, warned that if the government amends the fiscal plan approved by the board, it will not have the entity’s blessing.

“Prepa’s governing board approved (with my abstention) a fiscal plan for FAFAA to submit it to the financial oversight board. If that plan is amended, then it is FAFAA’s plan and not Prepa’s plan,” he told Caribbean Business.

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