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Prepa Believes It Can Obtain Investment Grade in Securitization Bonds

By on July 21, 2016

SAN JUAN—The Puerto Rico Electric Power Authority (Prepa) said Thursday that it has not begun the formal rating process for the new securitization bonds, but acknowledged that there is no assurance that the bonds will receive an investment grade, a requirement established in the restructuring agreement with creditors of the utility’s $9-billion debt.

The Puerto Rico Electric Power Authority (PREPA) logo is displayed in San Juan, Puerto Rico, on Friday, April 29, 2016. The indebted Caribbean island, home to 3.5 million U.S. citizens, has juggled dwindling resources from one hand to another for months now, to keep creditors at bay. The crisis is set to tip into a new phase this weekend when $422 million of payments are due and, as things stand, unlikely to be made in full -- threatening the biggest default yet. Photographer: Erika Rodriguez/Bloomberg via Getty Images

The Puerto Rico Electric Power Authority (PREPA) logo is displayed in San Juan, Puerto Rico, on Friday, April 29, 2016.  Photographer: Erika Rodriguez/Bloomberg via Getty Images

In a statement, Prepa said it has not yet initiated the formal rating process for the new securitization bonds and none of the credit rating agencies have denied or rejected any request for a rating of such bonds.

“Over the past few months, Prepa has been meeting with the rating agencies to talk to them about [the utility], the regulatory process and the restructuring efforts, with the objective of keeping them up to date and maintain an open dialogue. Although there is no assurance that the securitization bonds will receive an investment grade rating, Prepa continues to believe that there is a path to obtaining an investment grade rating for the securitization bonds and intends to initiate a formal rating process with rating agencies in the near future,” the statement read.

The declarations were in response to a Caribbean Business report about a recent governing board meeting at Prepa in which the subject was discussed. Board member Carlos Gallisá and other sources said that during the meeting they were told that the credit rating agencies are declining to give the new restructuring bonds an investment grade.

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. In order 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. 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’s Revitalization Act that created Prepa’s Revitalization Corporation 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 of the credit rating agencies declined to give the (new) bonds an investment grade,” said Carlos Gallisá, one of two consumer representatives to Prepa’s board.

“Since that did not happen, Prepa must go back to the negotiating table with bondholders,” Gallisa added.

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