Friday, October 7, 2022

Prepa Debt-Restructuring Deal Headed for Title VI

By on April 12, 2017

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

The Puerto Rico Electric Power Authority logo is displayed in San Juan, Puerto Rico. (Erika Rodriguez/Bloomberg via Getty Images)

BY EVA LLORÉNS VÉLEZ  & PHILIPE SCHOENE ROURA

SAN JUAN – Parts of the Puerto Rico Electric Power Authority’s restructuring support agreement (RSA), the only consensual debt-restructuring deal made by the government, may have to be enforced through the court bankruptcy process under the federal Promesa law, according to Caribbean Business sources and documents.

“The deal was designed to take the debt restructuring through Title VI [voluntary debt agreements]. There are some things that are going to go through Title III [the court-brokered bankruptcy process],” said a source close to the negotiations, who declined to elaborate further.

Wording in the agreement documents suggest creditors are willing to allow the utility to use Title III to address certain operational issues provided the financial debt of all RSA creditors is restructured using Title VI of the P.R. Oversight, Management & Economic Stability Act, or Promesa, which will allow the Financial Oversight & Management Board to implement the accord and bind all other Prepa creditors that are not part of the deal. However, in the event any creditor to the RSA determines that Title III would adversely affect or delay the implementation of the RSA through Title VI, then such creditor parties can terminate the agreement. Then, the implementation mechanism will have to be agreed upon by lawyers.

The RSA also has to be in compliance with Prepa’s fiscal plan, which has yet to be approved by the Oversight Board. “The certified fiscal plan, which shall contain projections on liquidity, shall be consistent with the terms of the RSA and otherwise reasonably acceptable to parties to the RSA,” another source said.

The agreement reached in 2015 with 70% of Prepa’s creditors cuts the utility’s $9 billion debt by 15% and offers creditors a bond exchange.

The modifications to the RSA in the latest negotiations, which still have to be ratified, will continue to keep Prepa’s cut to the debt at 15%. Creditors agree to exchange their current Prepa bonds for two types of bonds at an 85% exchange ratio that will be issued by Prepa’s Revitalization Corp. However, the maturity of the exchange offer was extended to July 1, 2047. The principal on the bonds will start getting paid in six years, or 2023. The rates of the CIBs, or current interest bonds, is 4.75% and the CABs, or capital appreciation bonds, is 5.50%.

The source said there could be another short extension on the deal because of its complexity and the sheer amount of documentation needed to iron out details. The extension is slated to end today, April 13.

“Most of the open items have been tied down, and there is some more due diligence being done, but the structure of the transaction is almost there. We now know who is going to provide the liquidity, and the debt-service schedule is clear; governance is set—with the three appointees by the governor, three independents and the three consumer reps,” the source said.

However, sources assured that National Public Finance Guarantee Corp. is still partly on board with the deal because, if Prepa goes to Title III, and not Title VI, the monoline insurer will be in a weak position and forced to cover Prepa’s debt payments. National has $1.2 billion debt exposure to Prepa.

The source said National was on board with “the core of the agreement,” and the good-faith negotiation is that the deal will go through Title VI, or voluntary restructuring. A summary of the latest proposal says National agreed to relend $126 million and would get a 7% interest rate.

Is it essential that they be on board with the deal? “Yes, it is almost indispensable. So, Prepa must now contribute to the surety fund with 1% to help soften the blow to bond insurers in the deal. In the previous RSA, bond insurers were covering 100% of the surety. And I believe the Ad Hoc group is contributing to the fund as well,” the source said, referring to the surety to guarantee debt service.

Prepa’s creditors have also agreed to provide new money to Prepa, which is subject to an agreement on sizing of new money needs and negotiations on the terms. The new money is needed for capital projects although Prepa creditors have also said they are open to attracting investment.

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