PREC Continues to Shepherd Prepa Debt Restructuring
Any persons or entities interested in intervening in the review of the petition by the Puerto Rico Electric Power Authority (Prepa) for a new rate structure have until April 19 to submit their written remarks, the Puerto Rico Energy Commission (PREC) announced Thursday.
Prepa’s request for restructuring consists of at least seven types of bonds of varied amounts and purposes that will be exchanged for current Prepa bonds and which will be financed through a “Transition Charge” paid by customers. Said charge would be adjusted at least twice a year to ensure there are sufficient revenues for the timely payment of the bonds.
The restructuring petition submitted to PREC on April 7 by the Quiñones & Arbona law office and the Rooney Rippie & Ratnaswamy law firm from Chicago, must be evaluated in an expeditious manner as stated in the recently enacted Revitalization Act.
The Energy Commission declined to comment on the proposal. “As this is an adjudicative process, the PREC’s commissioners are ethically bound to abstain from making public expressions about the case evaluation process. In due time, resolutions will be made about the procedural instructions related to public participation for said process”, Energy Commission Chairman Agustín F. Carbó said in a statement.
The petition obtained by Caribbean Business places before the Commission a proposed Restructuring Resolution that provides for financing of approved restructuring costs through the issuance of bonds, imposes and provides for the collection of transition charges, and describes how the transition charges will be calculated and adjusted through a so-called “adjustment mechanism.”
“Transition charges” is defined in the document as “those rates and charges that are separate from rates and charges of Prepa,” while the “adjustment mechanism” is a complicated formula that will be applied periodically but no less than twice a year to ensure there are enough revenues for bond payments and financing.
A resolution issued by the Commission this week states that it will focus on the accuracy of the mathematical calculations and the other numbers provided in the petition.
During the past several decades, Prepa issued substantial debt to fund capital expenditures and, in the case of fuel related credit facilities, operating expenses. In total, Prepa has debt obligations of approximately $9 billion, including nearly $735 million currently due under its revolving fuel lines of credit and approximately $420 million in principal and interest that will be due on or before July 1, 2016 under its outstanding bonds.
Prepa cannot meet these financial obligations absent a financial restructuring and transformative change. In light of its financial situation, Prepa negotiated a Restructuring Support Agreement (RSA) with creditors holding or insuring approximately 70% of the face amount of Prepa’s outstanding financial indebtedness.
The RSA provides for the creation of a Prepa Revitalization Corporation through which the new bonds will be issued.
For the existing Prepa uninsured bondholders that participate, the RSA provides for an 85% exchange rate—or a 15% discount to principal owed under existing uninsured Prepa bonds—as well as a five-year principal holiday and an agreed-upon weighted-average interest rate pursuant to a pricing grid included in the RSA that is projected to be lower than the weighted-average interest rates on Prepa’s existing bonds. In return for a commitment to exchange certain insured Prepa bonds with mirror bonds, the monoline insurers will provide an additional capital commitment in the form of one or more, debt service reserve fund surety policies to provide credit support for the Bonds.
The different bonds included are:
a) Exchange Offer Bonds in an initial aggregate principal amount not to exceed $4.97 billion, to be issued to the beneficial owners of Prepa bonds that are not insured Prepa bonds
b) “Mirror Bonds” that include bonds, in an initial aggregate principal amount not to exceed $2.086 billion to be deposited in an irrevocable escrow to solely legally or economically exchange the Prepa bonds insured by the monoline bond insurers that have signed the RSA.
c) Bonds, in a principal amount not in excess of the sum of 6.25% for certain payments that include debt service and the Internal Revenue Service.
d) Bonds, in an initial aggregate principal amount not in excess of $50 million, to fund a deposit to the Prepa Self Insurance Fund of the Restructuring Resolution.
e) “Cash Offer Bonds,” in an initial aggregate principal amount not exceeding $2.6 billion for the purpose of funding the costs to refund, redeem or purchase, directly or indirectly, uninsured Prepa bonds with the goal of increasing the exchange offer participation levels.
f) “Lender Bonds,” in an initial aggregate principal amount not exceeding $625 million, issued to the Supporting Creditors in exchange for the extinguishment of the obligations due and owing under certain Credit Agreements, and
g) “Closing Date Syncora Bonds,” in a principal amount not exceeding $240 million, to be issued to restructure, refund, redeem, exchange or purchase Prepa bonds insured by Syncora Guarantee Inc.
The petition provides for the issuance of additional bonds after the initial issuance that include: one or more series of bonds, in an initial aggregate principal amount not to exceed $750 million to one or more holders of 2016 Prepa bonds, at an exchange ratio of 100%, in voluntary exchange for such 2016 Prepa bonds and bonds that shall not exceed $240 million to purchase Prepa bonds issued by Syncora.
The bonds will be paid and certain other expenses will be funded through transition charges that customers will be obligated to pay. The transition charge will be developed based on a collection curve reflecting the timing of payments of outstanding bills during a 12-month period, adjusted to assume that any transition charges which are not collected within 120 days of billing are written off, which means that customers who pay their bills will also pay for the delinquent customers. The adjustment mechanism will increase or decrease the transition charges in response to changes in financing costs.
While Prepa officials said the transition charge will be a fixed rate, the document says the adjustment mechanism will bring it up or down.