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Preliminary agreement with Puerto Rico power utility bondholders reached

By on July 30, 2018

SAN JUAN – The Financial Oversight and Management Board for Puerto Rico, the island’s Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym) and the Puerto Rico Electric Power Authority (Prepa) have reached an agreement with the Ad Hoc Group of PREPA bondholders, both the board and Gov. Ricardo Rosselló announced late Monday.

The agreement, contained in a preliminary restructuring support agreement (RSA) and term sheet, “represents a necessary step for a complete overhaul and transformation of the energy sector in Puerto Rico,” according to a press release issued by the governor’s office, La Fortaleza.

“As we have stated in the past, the restructuring of PREPA’s debt and obligations is critical to completing our vision for a consumer-centric energy sector with financially viable rates that promote economic development on the Island,” Rosselló said. “The RSA is the result of good faith negotiations, consistent with our Administration’s policy of reaching consensual agreements.”

The administration 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.”

Under the new RSA, 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; 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, both the board and the administration said. 

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 its release.

“This negotiated agreement – the first of its kind in the Commonwealth’s restructuring – is a significant positive achievement for all parties involved,” the bondholder group, which holds more than $3 billion in Prepa debt and includes funds from more than a dozen states, Goldman Sachs and OppenheimerFunds, said in a statement Monday evening as well.

“By addressing PREPA’s legacy debt a pathway can be cleared to accelerate the transformation and long-term viability of the utility. Under the terms of the agreement, our recoveries are now tied to PREPA’s sustainable success, and we are pleased to take part in a transaction which we are confident will ultimately further the economic revival of not just the utility, but the Commonwealth and its people.”

The proposed RSA “will further enable PREPA to take the steps necessary to modernize its operations and implement the Administration’s transformative energy policy, including attracting new private investment through the concession of the T&D [transmission and distribution] systems and privatization of the current generation fleet,” La Fortaleza’s announcement reads.

“The Preliminary Agreement is an important milestone and a big step forward towards PREPA’s debt restructuring process, which will support the privatization and transformation of PREPA into a modern, world-class utility,” Chairman José Carrión said in the board’s release.

“We are hopeful that the terms and financial concessions agreed to with this group of PREPA bondholders can lead to a fair consensual transaction that adjusts their ultimate level of recoveries with the success of the utility. As we move forward with PREPA’s debt restructuring and further reduce uncertainty and risk, investors will gain confidence in its ability to achieve a sustainable future, which in turn furthers Puerto Rico’s recovery,” he added.

The parties “have agreed to work collaboratively and in good-faith over the upcoming weeks to negotiate a definitive” RSA, and the fiscal board, the utility and Aafaf “will continue working to build additional support of PREPA’s other creditors, including the monoline insurers and fuel-line lenders,” La Fortaleza assured.

See the preliminary RSA here.

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