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ICSE: Newest utility debt-restructuring pact will do little to attract investors

By on August 1, 2018

SAN JUAN – The preliminary agreement reached this week between the Ad Hoc Group of Prepa Bondholders with Puerto Rico’s power utility will not help attract investment to Puerto Rico.

“It’s not clear–the final value of the debt that would finally be securitized. This is important in the comparison between the present and future levels of Prepa’s assets,” said engineer Tomás Torres Placa, the executive director of the Puerto Rico Institute for Competitiveness and Sustainable Economy (ICSE).

The administration of Gov. Ricardo Rosselló estimates that the terms will “achieve more than $3 billion in debt-service savings for the upcoming 20-year period as compared to the restructuring agreement negotiated under the prior administration.”

The debt is of about $9 billion, Torres Placa said. “If we apply the 35% [debt cut], then we are left with $6 billion in debt. To make it more attractive for investors, that number must be lowered. The level of debt should be 50% [of the total],” he added.

Tomás Torres Placa, executive director of the Institute for Competitiveness and Sustainable Economy, and Rodrigo Masses, president of the Puerto Rico Manufacturers Association (Courtesy)

A previous restructuring support agreement (RSA) for the Puerto Rico Electric Power Authority (Prepa) that was rejected by the island’s Financial Oversight and Management Board also included monoline insurers and fuel lenders, two groups that do not appear in the new preliminary RSA (PRSA). About $8 billion of the debt is owed to bondholders.

Torres Placa also expressed concerned that the preliminary agreement does not discard the possibility of a solar tax, a fee that would be separate from a transition charge of about 2% or more that will increase rates in coming years. The agreement was reached by court-appointed mediators in the bankruptcy-like case under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa).

“This is an agreement that was mediated under Promesa. That is why these issues must be resolved soon,” he stressed.

Under the new preliminary agreement, bondholders can exchange their outstanding bonds for two classes of new securitization bonds: Tranche A bonds will be exchanged at 67.5 cents on the dollar and are expected to mature in 40 years, while Tranche B “growth” bonds “will be tied to the economic recovery of Puerto Rico” and mature in 45 years. The latter will be exchanged at 10 cents on the dollar.

The terms “have addressed the concerns of the Oversight Board of potential cost increases to ratepayers by setting a fixed transition charge each year to be borne by consumers and transferring the long-term demand risk to the bondholders.

“In support of the process underway to make viable the transformation of PREPA, this PRSA will result in savings upwards of 30% in debt service over the first 20 years relative to the previous Restructuring Support Agreement (RSA), without requiring rate increases to cover debt service in the event electricity usage declines,” the board said in a release early this week.

Comerio Mayor José “Josian” Santiago, who was also a former Mayors Association president,  said he was worried that Puerto Ricans, in the end, will have to pay more in electricity at a time when the government is wasting money in ritzy contracts and vehicles. However, he said the debt to Prepa bondholders must be paid,

“At the end of the day, the debt must be paid. Any agreement aimed at reducing what at the end of the day we have to pay is favorable, but I don’t know the terms of the document because I haven’t read it. I hope the government does what is needed to reduce the burden [stemming from] the irresponsabilities the people didn’t commit” he said.

–Rafelli González contributed to the story.

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