Donahue says Prepa won’t use Promesa to get better deal from bondholders
SAN JUAN – Puerto Rico Electric Power Authority (Prepa) Chief Restructuring Officer Lisa Donahue said Thursday that while the utility will seek to bind all its creditors to the utilty’s debt restructuring deal through the federal Promesa legislation, it won’t attempt to get a better deal from bondholders.
“We intend to continue preserving the [restructuring support agreement (RSA)] but would use Promesa as a mechanism to get 100 percent participation versus 70% participation,” she said, referring to the utility’s deal to restructure its $9 billion debt reached more than a year ago.
Donahue spoke at a hearing of the Puerto Rico Energy Commission, which is evaluating a permanent electric rate increase by the public power utility. At issue is the revenue required for Prepa operations. In a study, the commission’s experts, Ralph Smith and Mark Dady, contend Prepa’s revenue requirement is around $2.9 billion, but Prepa’s own experts put the revenue requirement in June at $3.4 billion. The commission must issue its determination on the rates or it could lose jurisdiction on the matter.
Critics of the rate hike contend that Donahue and Prepa should use Promesa to negotiate a better restructuring deal because the current one, which expires Dec. 15, provides bondholders a 15% cut.
“Why is it that the existence of Promesa now doesn’t give you a chance to drive a hard bargain with bondholders, the commission’s technical examiner, Scott Hempling, asked.
Donahue said that under Title III of the Puerto Rico Oversight, Management and Economic Stability Act, to effect a deal, the utility would have already needed a deal in place. She noted that the RSA is a good deal and that because the bonds are secured by revenues, bondholders should get 100% of what they invest.
During the hearing, Hempling mentioned that the Promesa fiscal oversight board’s intervention raises two legal questions. These are whether Promesa’s authority to approve budgets will be preempted by of the commission’s authority; and whether it will have the power to limit the commission’s authority to prescribe actions. The oversight board recently asked Prepa to submit its own fiscal plan.
Regarding the rate evaluation, Hempling said that some intervenors have suggested that the commission should set rates based on reasonable costs so that revenues are insufficient to pay off bondholders because it will put Prepa in a better negotiating position relative to bondholders.
“To set up a municipal utility to default in the hope that you can artificially create some sort of incremental power with creditors is a dangerous thing. These are special revenue bonds; the deal we have negotiated is fair and balanced, and gives Prepa the requirements of the breathing room to invest in the system. I would be concerned with the effect of that strategy,” she said.
She cautioned the commission to avoid making Prepa go into default because while there is a stay on all litigation imposed by Promesa, it would be embroiled in litigation after that. The utility successfully negotiated fuel supplies with two vendors, and going into default would result in the loss of their credit, which means the utility will have to pay for fuel upon delivery or in advance.
Prepa’s executive director, Javier Quintana, said that Prepa as well as the Aqueduct and Sewer Authority are expected to make significant investment in infrastructure, some of which will come from the private sector. A default will deter private investors.
In response to a question, Donahue also said that if the utility doesn’t carry out a bond exchange by July 1, there will be more than $400 million due in principal and bonds. Assuming the deal isn’t executed, the utility foresees doing a relending with some of the creditors as it has done in the past. The last relending was done at an 8.5% interest.
The five-year holiday on debt payments hasn’t begun.
Donahue also denied claims that there is an “arms-length” relationship between her and the creditors. She said she was hired by Prepa’s board and has a fiduciary responsibility to the utility.
One of the intervenors, identified as Tom Sanzillo, insisted that in its Jan. 11 order on the new rates the commission should require that Prepa explore financing forward-looking investments through securitization of bonds, but Donahue said the law establishes limits on what Prepa can do with the securitization mechanism. Right now, the mechanism is being viewed to finance the Aguirre Offshore Gas Port in the southern part of the island.
Sanzillo warned that because the level of debt that Prepa has is unsustainable and that customers won’t be able to pay for it, Prepa must go “back to the drawing board” and find ways to reduce its debt as he believes the utility can only afford $3 billion to $4 billion in debt.
“If this revenue requirement that is put forward in proceeding including the transition charge, is approved, it means this commission will certify the revenues that are provided in the docket and that those revenues will allow Prepa to meet its budget and other financial projects,” he said about the repercussions of its decision.
Sanzillo also asked the commission to impose several items in its Jan. 11 order that include the imposition of an independent private sector inspector “to send the signal to the markets that the many internal and financial problems will be addressed in aggressive manner.”
Earlier in the day, Donahue went into Prepa’s finances. She said the provisional rate hike that began in August is yielding around $18 million a month. Prepa is currently negotiating an extension of its restructuring support agreement, which expires Dec. 15.
The utility must make a $200 million interest payment on debt by Jan. 1 and a $400 million payment in interest and principal July 1, Donahue said in response to questions by Hempling.
The utility’s normal operating cash is nearly $600 million, but $146 million of it is in the Government Development Bank. “So we don’t have access to it,” she said.
Donahue said the utility also has a “fuel line debt” that has matured but is subject to a forbearance agreement. That debt is of $700 million.