Assured blasts Puerto Rico fiscal board for annual report

SAN JUAN – Assured Guaranty, a bond insurer with $5.27 billion worth of exposure to Puerto Rico issuers covered by the federal Promesa law, critcized the first annual report of the Financial Oversight & Management Board, accusing board members of hiding financial data from creditors and approving faulty fiscal plans.

In a letter to the fiscal board sent Monday, Dominic Frederico, president & chief executive officer for Assured, said the company has participated in Puerto Rico’s capital markets for decades by providing insurance policies on bonds, as well as in other issuances and transactions around the world.

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“Based on this experience, it is Assured’s view that a number of the Oversight Board’s actions have resulted in setbacks rather than progress towards achieving the Oversight Board’s mandates,” he said, adding that Promesa specifically orders the board to achieve fiscal responsibility and access to the markets for Puerto Rico.

The fiscal board’s annual report cites the certification of a 10-year fiscal plan and the fiscal year 2018 budget for the commonwealth and its instrumentalities, including component units Puerto Rico Electric Power Authority, the Aqueduct and Sewer Authority and the Highways and Transportation Authority as evidence of substantial progress. Assured, however, says the board has not ensured that such plans are “accurate, sound, reasonable, or even lawful.” Once they are certified, the plans are immune from third-party challenges, the board has assured, citing Promesa.

Financial Oversight & Management Board Chairman José Carrión III and board member Ana Matosantos. (File Photo)

“With respect to the information pertinent to the development of certified fiscal plans and other matters that are of great importance to creditors, the Oversight Board has refused multiple creditor requests,” Frederico said. “We find sorely lacking the detailed financial and operating information, as well as access to government officials and their advisors that a reasonable investor would expect to receive before agreeing to any restructuring.”

He noted that the fiscal plans certified by the board collectively “fail to differentiate between essential and non-essential services; incorporate unrealistic assumptions on economic growth, in order to manufacture dire financial projections that reinforce a crisis-narrative; and grossly underestimate the federal government’s commitment to the welfare of Puerto Rico.”

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The company president further said the board “pad[s] the fiscal plan expenses with an unexplained ‘expense reconciliation adjustment,’ or, in plain-speak, a $600 million per year unallocated cost overrun fund that defeats the purpose of budgetary restraint and government accountability; fail[s] to update budgets and fiscal plans to account for recent revenue outperformance; fail[s] to provide adequate transparency; and ignore[s] the relative rights, priorities, liens and pledges securing bonded debt issued by issuers.”

With respect to 1,700 files the report claims have been uploaded to various data rooms, Assured said a great number of the files either relate to Prepa’s operations, rather than the broader commonwealth’s financial position, and were provided to Prepa creditors by that entity’s advisers before the appointment of the board and the development of any fiscal plans.

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He said many files are already public or relate to information “that is largely immaterial, rather than directly respond to creditor requests.”

“In light of this flawed dynamic, certification of deficient fiscal plans seems intended to pressure creditors to make concessions against their interests, but instead has led to a barrage of litigation and a breakdown in discussions, all counterproductive to achieving the goals of PROMESA, or any consensual resolution of disputes,” the letter reads.

The report states that “the Oversight Board and its advisors have held numerous constructive meetings, mediation sessions and presentations with creditors to restructure the debt of the Commonwealth and its various covered entities….”

However, Assured says it has not found any meetings to date on debt restructuring to be constructive and has instead “witnessed the Oversight Board’s refusal to proceed with Prepa’s restructuring support agreement,” referring to the board’s decision to reject the electric utility’s restructuring support agreement.

The report does highlight the importance for the island of regaining access to capital markets, but Assured says the board’s current course will not restore market access.

“The Oversight Board has advocated that all Puerto Rico entities are subordinated to the social needs and entitlement programs of the Commonwealth, notwithstanding the Constitutional, contractual and other legal protections specifically established that prevent that outcome so that marginal credits, like the Commonwealth and its public corporations, can access capital markets at reasonable interest rates,” Frederico said.

Puerto Rico’s power utility creditors ask court to appoint receiver

SAN JUAN – Creditors of the Puerto Rico Electric Power Authority (Prepa) seek to lift the Promesa law’s stay and appoint an independent receiver for the utility to oversee certain operations of the public corporation and which could result in increased rates.

The motion, which has more than 1,000 pages, was filed Tuesday by National Public Finance Guarantee Corp., the Ad Hoc Group of Prepa Bondholders, Assured Guaranty Corp. and Syncora Guarantee Inc.

They seek to enforce their rights after the island’s financial oversight board rejected Prepa’s deal to restructure its roughly $9 billion debt.

“As PREPA’s single largest creditor, we worked tirelessly for several years with all stakeholders on a comprehensive restructuring that the Oversight Board forced off the table in violation of PROMESA. As a result of the default precipitated by the Oversight Board’s unlawful action, we now have little option but to enforce our legal and contractual rights, and to ensure PREPA sets rates and charges that are sufficient to meet its financial obligations,” stated Bill Fallon, CEO of National, a bond insurer with exposure to Prepa.

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He added that given the utility’s most recent actions and its “lengthy history of mismanagement and cronyism and the inherent conflicts of interest ignored by the Governor and the Oversight Board, an independent receiver will provide much-needed protection for PREPA, the citizens of Puerto Rico and its creditors.”

The motion comes a day after National and Assured amended a complaint they filed in June, in a separate process in U.S. district court against the fiscal board.

Back then, the insurers sought an order, or mandamus, to force the certification of Prepa’s restructuring support agreement (RSA), which had failed to get the board’s support as a qualifying modification under Title VI of Promesa.

On Monday, the insurers modified their complaint to instead have the court declare that the RSA was a “preexisting voluntary agreement” as defined by Promesa—and thus had to be certified—and that the board’s failure to approve the RSA was unlawful under the federal law.

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Prepa has more than $8.3 billion of bonded debt as well as approximately $700 million currently due under two lines of credit used by Prepa to pay for the purchase of fuel, the suit says.

With a total exposure of over $2.3 billion to Prepa, National and Assured said they hold or insure approximately 25% of the utility’s total outstanding debt and are significant stakeholders “that want the utility reformed into a modern, sustainable, and successful power authority.”

In December 2015, Prepa and the vast majority of its creditors agreed on a restructuring blueprint, the only deal of its kind agreed upon before Promesa became law in June 2016.

Congress acknowledged that fact and grandfathered the RSA, singling it out for fast-track approval under the consensual resolution provisions of Promesa’s Title VI, the bond insurers argue.

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But once a new administration came into office early this year, the commonwealth and Prepa creditors agreed in April to renegotiate the existing deal.

“The supplemented RSA maintained the structure and main features of the original deal, but it provided additional and significant relief to Prepa that effectively would have resulted in the reduction of the per kWh [kilowatt-hour] rate charged by Prepa to consumers. Prepa submitted the supplemented RSA to the Oversight Board on April 28, 2017 for certification and implementation under Title VI of Promesa,” the insurers say.

Since Congress intended to preserve the RSA as the only preexisting voluntary agreement, it provided for expedited certification of the RSA under Promesa, without the need for substantive review and evaluation by the board, according to the monolines.

They add that “overstepping its statutory authority under Promesa,” the board rejected the RSA.

“By rejecting the RSA, the Oversight Board deprived Prepa of the critical liquidity provided to Prepa under the RSA, which Prepa desperately needed to service its debt obligations, including a payment of principal and interest maturing on July 1, 2017 and due to be paid on July 3, 2017,” the suit says.

Prepa filed for bankruptcy under Title III of Promesa on July 2. The following day, U.S. Bank, the utility’s trustee, notified Prepa’s creditors of certain events of default that have occurred under the trust agreement, including failure to make payment of more than $450 million in principal and interest that was due July 3.

“The clock is ticking on Prepa’s restructuring, and Puerto Rico cannot afford to endure a PREPA bankruptcy that could turn the lights off,” the insurers stated.

[EDITORIAL] The Leaning Tower of Lisa

editorial-philipe-schoeneLisa Donahue’s exit as the Puerto Rico Electric Power Authority’s (Prepa) Chief Restructuring Officer is a day that critics of the bankrupt utility’s restructuring could not see coming soon enough; you could hear chants of “se acabó el guiso in the Mambo Tropics,” among the naysayers. Her supporters, on the other hand—most Prepa bondholders and AlixPartners’ restructuring brigades who worked alongside her—do not share that joy.

In fact, there is consternation among some observers of the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) sweepstakes because the Ricardo Rosselló administration is taking a second crack at a deal that was hard enough to put together in the first place. Think about it—you have different creditor groups: retail bondholders, fuel-line lenders and monoline bond insurers Assured and National, which had serious concerns that a principal hit would impact liquidity.

Donahue sat at the table with these groups to hammer out one forbearance agreement after another—all told some 14 extensions to the forbearance agreement were issued. Prepa made a $415 million payment for its power revenue bonds to creditors in July 2015 using $153 million in cash from the central government’s general fund.

Then, to provide liquidity for working capital, insurers of Prepa’s power revenue bonds agreed to purchase $128 million in short-term scheduled notes to be paid in full by Dec. 15, 2015. All told, Prepa struck four similar deals across the next two years.

Lisa Donahue, AlixPartners' chief restructuring head (File)

Lisa Donahue, AlixPartners’ chief restructuring head (File)

Then there was the complexity of achieving the restructuring support agreement (RSA). No small thing to get the monoline bond insurers on board, who wanted surety in the exchange to limit exposure.

With 70% of the creditors on board, the Prepa deal is seen by Republicans on the Hill as an ideal candidate for Title VI in Promesa because it would bring in the 30% of creditors who are holdouts by making use of collective action clauses, which allow a supermajority of creditors to agree on a debt-restructuring deal that is binding on all, even the holdouts.

Although some skeptics believe there is nothing in Title VI to prevent holdouts that want a better deal from filing for injunctive relief, two bankruptcy experts who talked to Caribbean Business insist that the prospects of closing the deal under Title VI vis-à-vis the prospects of dragging out the process in litigation under Title III will lead to a final Prepa deal being struck.

So, creditors are nervous that the deal will unravel. The monoline bond insurers who were brought on board—a maneuver as messy as pulling teeth—are particularly concerned that they will be asked to share the pain. It took reduced exposure to bring monolines onboard—now, if the Rosselló administration wants another pound of flesh, the whole thing could come apart.

Had the deal Alix’s Donahue struck been closed—she would have earned her keep. Now, all that work may have all been for naught.

Here’s the thing with the oversight board—everyone is looking at the task at hand from a rhetorical standpoint and at some point, someone is going to have to roll up their sleeves and get in there, get dirty, sit down and start closing deals. Nadie quiere bañarse con el puerco en el fango—in other words, nobody wants to tangle with the pig in the mud.

Next up on Prepa’s timeline is the presentation of the utility’s fiscal plan on Feb. 21, with the RSA expiring on March 31. Let’s focus on bringing Prepa negotiations to a close—Puerto Rico can ill afford to pay more legal fees to pricey attorneys who want a second crack at a deal. And there is so much work to be done on the job creation front, which has sadly taken a backseat in this oversight charade.

Government Asks Judge to Dismiss National’s Lawsuit

SAN JUAN – The government asked a federal judge Tuesday to dismiss a suit filed by National Public Finance Guarantee Corp. challenging the constitutionality of the Puerto Rico Emergency Moratorium and Financial Rehabilitation Act, arguing the firm has no standing.

The government’s motion to dismiss was filed in court even though Judge Francisco Besosa has yet to decide whether to stay the lawsuit following the enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa), which imposes a stay on lawsuits filed after December.

National is a monoline insurer that has provided financial guaranty insurance for more than $715 million in bonds issued by the Puerto Rico Highways and Transportation Authority; approximately $684 million in bonds issued by the Puerto Rico Sales Tax Financing Corp.; $66 million issued by the Puerto Rico Industrial, Tourist, Educational, Medical and Environmental Control Facilities Financing Authority (AFICA); and $985 million of general obligation debt issued by the commonwealth.  

On June 15, the company sued the government, seeking to have the Moratorium Act declared unconstitutional. One week later, on June 22, the firm filed a Motion for Partial Summary Judgment. Sometime later, President Obama signed Promesa into law, significantly altering the landscape of this litigation. The law provides for an automatic stay of legal proceedings until at least Feb. 15.

The government filed a Notice of Automatic Stay on July 7. The court gave the parties until July 18 to respond to the stay.

National Public Finance Guarantee is a wholly owned subsidiary of MBIA Inc.

National Public Finance Guarantee is a wholly owned subsidiary of MBIA Inc.

In its petition to dismiss, which the government says it was filing as a protective measure, officials noted that National had not satisfied a requirement that it had legal standing because it was not protecting its own rights.

“Plaintiff is a monoline insurer, not a bondholder. Yet it seeks to bring this suit to vindicate the rights of bondholders…. For similar reasons, plaintiff’s claims are not ripe…. To the extent that plaintiff’s claims are based on the impairment of supposed contractual or property interests of bondholders, those claims fail because it does not yet stand in the shoes of those bondholders (and, in any event, none of those rights have yet been impaired). To the extent that plaintiff’s claims are based on a fear that it will be forced to make payments on obligations suspended pursuant to Act 21, that fear is speculative. The Court cannot adjudicate plaintiff’s claims at this point,” the government said.

The government also dismissed National’s allegation that the Moratorium Act violates the contract clauses of the constitutions of the United States and Puerto Rico.

“It is by now well settled that the Contract Clause does not prevent a state from safeguarding the welfare of its citizens during economic crisis…. Assuming arguendo that plaintiff could show substantial impairment of its contractual rights, plaintiff would still be unable to show that such impairment violates the Contract Clause. As already discussed, the Contract Clause does not prevent a state from the appropriate exercise of its police power,” the government said.

Regarding claims that the Moratorium Act violates the Takings Clause of the federal Constitution—which provides that “private property [shall not] be taken for public use, without

just compensation,” the government said National has not identified a single contractual provision giving it the rights it asserts. “Instead, plaintiff cites only bondholder agreements giving bondholders certain contractual rights. Plaintiff cannot ground a Takings Clause claim based on someone else’s rights. But even if plaintiff were attempting to assert its own rights, the contractual rights at issue would not be ‘property’ within the meaning of the Takings Clause,” it said.

“[P]laintiffs must first establish an independent property right before they can argue that the state has taken that right without just compensation…. Courts have long distinguished between contractual rights to obtain payment on a debt—which are protected by the Contract Clause—and rights to particular property acquired through a contract—which are protected by the Takings Clause,” it added.

Assured Guaranty Pays Insured Bondholders Following Puerto Rico Default

SAN JUAN – Two bond insurance subsidiaries of Assured Guaranty Ltd. have made debt service payments to holders of insured general obligation (GO) and other bonds on which Puerto Rico and certain of its instrumentalities defaulted on July 1, the company said in a statement.

“As always, investors owning Puerto Rico-related bonds insured by Assured Guaranty will continue to receive uninterrupted full and timely payment of scheduled principal and interest in accordance with the terms of Assured Guaranty’s insurance policies,” the company stated.    

Assured Guaranty screenshotHowever, in the same statement, Assured added: “It is regrettable that Puerto Rico has chosen to violate its constitution by ignoring the senior payment priority securing the Commonwealth’s GO bonds. The Puerto Rico constitution unambiguously states that the Commonwealth’s GO debt is to be paid before all other expenditures, and no funds may be applied to other obligations until the GO debt has been fully paid.

“The default on all the GO bond payments continues the pattern of bad faith and reckless disregard for the law that has characterized the current administration. Budgets recently proposed by both the Puerto Rico administration and the Puerto Rico assembly have referenced available monies for at least partial payments of the GO bonds. The decision to default in full on GO debt payments appears opportunistic in the wake of the recent enactment of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which has a provision staying creditor lawsuits. Throughout the last week of June, in an effort to facilitate the administrative aspects of making timely payments to insured investors, Assured Guaranty attempted, to no avail, to determine from Puerto Rico which Assured Guaranty insured credits would have claims for July 1 payments.”   

The insurer continued: “Additionally, Puerto Rico’s clawbacks, beginning in December 2015, of revenues pledged to certain non-GO debt would have been lawful and permissible only when all other revenue sources for GO payments had been exhausted, a condition that was not met at the time the clawbacks were initiated and that remains unmet. And insofar as clawbacks were constitutionally permitted, any funds clawed back may only be applied to pay GO debt. Puerto Rico has said that through June 30, 2016 it clawed back $453 million, of which it applied $164 million to GO bond payments due in January 2016. Of the $289 million balance, none was applied to the July 1, 2016 GO bond payments, $143 million is reportedly being held at the Government Development Bank where it is essentially frozen, and $146 million is reportedly being held at a commercial bank without disclosure of how such monies will be applied.

“The Commonwealth’s disregard for the rule of law has disastrous ramifications for Puerto Rico’s credibility and future access to the capital markets. It will increase the future cost of borrowing to fund the infrastructure it needs to revive its economy, and the ultimate victims will be the people of Puerto Rico, who have been badly served by multiple administrations.

Assured Guaranty and many retail and mutual fund investors have helped Puerto Rico fund its infrastructure for many years and have every interest in seeing Puerto Rico return to financial health and economic vitality. Unfortunately, the essential steps to achieve those goals, including coming to fair consensual agreements with creditors, rooting out corruption and tax avoidance, and making accurate and timely financial disclosures, have not been undertaken by the current government.

Despite the historic size of Puerto Rico’s default and the current administration’s contempt for the rule of law, Assured Guaranty will continue to work with other creditors, current and future Puerto Rico administrations and the PROMESA oversight board to achieve consensual agreements that respect the constitutional, statutory, contractual and property rights of creditors while also supporting the island’s economic recovery.”


Can the Puerto Rico Gov’t Avert Default in May?

By Luis J. Valentín & Philipe Schoene Roura

Entering the stretch run toward doomsday—a May 2 deadline on a $422 million debt-service payment owed by the cash-strapped Government Development Bank (GDB)—the Puerto Rico government’s restructuring brigades are seeking separate deals from various creditor groups that could mitigate or even avert what Gov. Alejandro García Padilla called on Wednesday as an unavoidable default.

As previously reported by Caribbean Business, the commonwealth is closing in on forbearance agreements with some GDB creditors entitled to the May payment, sources say. But even if timely achieved, these deals would only cover about half of the $422 million, which could prompt the government to miss the remainder of the payment, officials have stated.

Two sources told Caribbean Business that a last-resort scenario could find municipal bond insurers covering the gap, by lending the cash to the commonwealth so it can avoid a default in May. Although none of the three monolines insure the GDB debt that hits in a few days, they have huge exposure across Puerto Rico’s other credits, particularly on the more than $1.5 billion in debt payments due July 1. If the government misses payments on insured debt, monoline bond insurers need to foot the bill. That was the case early this year, when the commonwealth partially defaulted on $36 million due Jan. 4 on P.R. Infrastructure Financing Authority bonds.Jim Millstein

“You could see the GDB making a payment with monolines relending the full remainder of the portion not covered by the [GDB] creditors, just to avoid a default,” said one source with knowledge of the negotiations.

The administration has repeatedly stated it has no cash to meet its summer payments in full—which include about $780 million in general obligation bonds (GOs)—while standing ready to default to avoid affecting essential services to residents.

Skeptics believe the government is pushing the crisis discourse to prompt favorable and timely congressional action. The House Natural Resources Committee recently delayed a vote on a bill that would grant Puerto Rico with access to a broad debt-restructuring mechanism, while establishing strong fiscal oversight on the island.

Monolines to the rescue?

“The monolines don’t want to see a scenario that begins a domino effect that would lead to having to cover payments come July 1. There is genuine interest on their end to see the payment made and then help replenish reserves through new notes,” one source said.

The GDB may execute a maneuver similar to the one employed by the Puerto Rico Electric Power Authority (Prepa) during a critical juncture in July 2015. As previously reported by Caribbean Business (July 1, 2015), the deal struck by Prepa at the onset of fiscal year 2016 had the utility making a scheduled payment of $415 million. To provide liquidity for working capital and other purposes, Prepa announced at the time that the three bond insurers had agreed to buy newly issued bonds, amounting to roughly $128 million.

“On that occasion, the utility tanked their reserves when they made the payment and then they had relending in a wire transfer bring the reserves back up,” the source said.

When asked Monday by Caribbean Business about the possibility of having a relending mechanism that could help the bank avoid a default on its May payment, the bank’s president & chairwoman, Melba Acosta, said, “It is not in discussion…. We are talking more about forbearance agreements.”

Alternatives to tackle May payment

Earlier this week, Acosta said the commonwealth is “talking with different groups” about separate deals. “With some groups, we are just talking about forbearance and maybe extending maturities. With others…maybe we are doing something else,” she conceded.

“All the creditors are watching each other. So, you know, the first that reaches an agreement sets a precedence over the rest,” added the commonwealth’s lead restructuring adviser, Millstein & Co.’s Jim Millstein, who was in Puerto Rico earlier this week, along with Richard Cooper, a partner at New York-based law firm Cleary & Gottlieb.

As reported on April 19, the GDB may have reached a tentative deal with one of its creditor groups, which owns $120 million of the May payment and about a fourth of the bank’s roughly $4 billion debt. In addition to a forbearance agreement, this group would be willing to exchange its GDB debt for new paper amid a haircut, or reduction to principal, in the vicinity of 50%, sources added.

The commonwealth is also engaging other GDB creditors, including a group of local cooperatives that hold about $30 million of the GDB’s May payment, sources said, in an effort to strike forbearance agreements with them.

But even if all these alternatives materialize, “we are talking about roughly half of the payment. So we are probably going to use the [recently enacted] moratorium law,” warned Acosta, who traveled to New York this week to continue debt-restructuring talks.

Meanwhile, the public-private partnership contract to control PR-5 and PR-22 between Metropistas, a local subsidiary of Spanish firm Abertis, and the P.R. Highways & Transportation Authority (HTA), was recently extended, a transaction that would provide $100 million to the cash-strapped authority.

When asked by Caribbean Business whether the administration would use the money to pay down the HTA’s mammoth $2 billion loan sitting on the GDB’s books, La Fortaleza Chief of Staff Grace Santana said it is premature to talk about the use of these funds since the financial closing has not taken place.

“Once we are certain the financial closing took place, then we will use the funds based on a recommendation from the GDB and Office of Management & Budget to the governor [as provided by the public-private partnership law]. When we are certain about this, we will talk about its uses,” Santana said.

On Wednesday, Metropistas stated it had paid HTA the $100 million from the contract extension.

As of early Thursday, La Fortaleza had yet to respond to Caribbean Business’ inquiries on how it plans to use the money, and whether it will be transferred to the GDB before Monday in an effort to help the bank come up with more cash to cover its debt payment.

Looking at the bigger picture

The commonwealth’s latest efforts to tackle the GDB’s debt woes are “a piece of a larger restructuring process…what we have called the superbond,” Acosta said.

To date, the so-called “superbond” is the administration’s only card on the table—a “global” structure whereby the island’s different credits are streamlined into a single “currency” by pooling in the various revenue sources that secure the repayment of these credits.

“Whatever we do in this GDB restructuring cannot negatively affect the ultimate restructuring. So we are making sure that the numbers do make sense, and that in any way, they don’t actually negatively put us in a worse position with the whole restructuring,” the GDB chief said Monday.

“Sometimes you could think that 47 [cents on the dollar] is a big number, a big discount, but you have to look at how much these notes are being traded right now. You have to look at the larger amount, and how it impacts the rest,” Acosta said, in reference to the GDB notes, which have been trading for months at dismal prices.

Plans call for having any debt restructuring deal reached with GDB creditors become a part of the superbond, if it is achieved down the road. “That’s the idea. That eventually whatever deal comes through, whatever happens [with the GDB], ultimately [the deal] is part of the superbond. Maybe the terms are different on the wrapping,” Acosta explained.

“Every little piece adds up with every other piece to a [debt] level that has to be sustainable overall. We can negotiate with individual credits, as we are doing right now with GDB holders, but we have to be mindful of the big picture,” warned Millstein, who continues to believe that once there is an agreement over economic terms, the structure would follow.


PREPA Announces Amendment to Restructuring Agreement with Key Creditors

prepa small

Prepa headquarters in San Juan

SAN JUANThe Puerto Rico Electric Power Authority (Prepa), Puerto Rico’s publicly owned electricity provider, announced Thursday that it has amended its previously announced restructuring support agreement (“RSA”) with the Ad Hoc Group of Prepa bondholders, its fuel line lenders, the monoline insurers, the Government Development Bank for Puerto Rico and the Puerto Rico Electric Authority Revitalization Corporation (the “SPV”).  PREPA also amended its Bond Purchase Agreement (“BPA”) with the Ad Hoc Group and certain monoline insurers.

The amendments, which have been agreed by holders of approximately 70% of Prepa’s financial debt, extend the date for filing a petition seeking approval of the securitization transition charge and adjustment mechanism for the “SPV” (now set for April 7, 2016).

Bond Insurers Call for Federal Fiscal Oversight, No Bankruptcy Regime for Puerto Rico

SAN JUAN – In a letter sent Friday to House Speaker Paul Ryan (R., Wis.), the Association of Financial Guaranty Insurers (AFGI) states that providing a bankruptcy regime for Puerto Rico to restructure its debt obligations is not the best path toward solving the island’s fiscal and economic crisis.

Moreover, AFGI members “feel strongly” that Puerto Rico needs independent fiscal oversight, which would best be provided by a “federally mandated control or oversight board authorized to implement the fiscal and economic reforms that the Commonwealth requires,” the letter says.

AFGI members include Ambac Assurance Corp., Assured Guaranty, Financial Guaranty Insurance Co., National Public Finance Guarantee Corp., MBIA Insurance Corp. and Syncora Guarantee Inc., insuring among them roughly $14 billion of Puerto Rico’s $70 billion debt.

The island’s future return to capital markets and economic growth “would be jeopardized were Puerto Rico incentivized to cease consensual debt restructuring negotiations in favor of nonconsensual restructurings under a bankruptcy regime or other new laws,” according to the letter.

While supporting U.S. Treasury Secretary Jacob Lew’s view on Puerto Rico’s need for independent fiscal oversight, AGFI believes the federal agency should also encourage consensual negotiations instead of a bankruptcy regime. They highlighted the Puerto Rico Electric Power Authority’s (Prepa) recently struck restructuring support agreement with a majority of its creditors, as an example that shows “consensual restructuring negotiations work.”

According to AFGI, the delay in debt-restructuring talks between Puerto Rico and its creditors, outside the Prepa case, “brings into question the Commonwealth’s objectives and raises concerns about coordinated efforts by the Commonwealth to delay the public corporations’ individual restructuring processes.”

They add it seems like Puerto Rico has “prioritized creating a ‘crisis narrative,’ as the commonwealth focuses on achieving bankruptcy instead of working toward a consensual solution with its creditors.

“Lew should use his authority to bring Puerto Rico’s government officials and creditors to the table to negotiate a restructuring that is fair to all parties,” the letter reads, adding that bond insurers are prepared to engage in talks with the commonwealth.

The García Padilla administration is banking on congressional action during the first half of 2016 in a bid to avoid Puerto Rico’s looming debt cliff come summertime. Insurers Ambac, Assured and Syncora have already sued the commonwealth over García Padilla’s recent fiscal maneuver to redirect revenue sources that were pledged to cover public corporation debt, a mechanism known as “clawback.”

During a visit to the island earlier this week, Treasury’s Lew once again urged for prompt congressional action on Puerto Rico’s fiscal crisis, namely providing a bankruptcy regime along with fiscal oversight that respects the commonwealth’s self-governance.

“Retroactively abrogating contractual and constitutional rights underlying Puerto Rico securities owned by U.S. taxpayers means ignoring the rule of law, which is the foundation of the $4 trillion U.S. municipal bond market,” AFGI states in its letter. “Bankruptcy of Puerto Rico municipal issuers would raise the cost or otherwise impair capital market access for thousands of U.S. municipalities seeking to sell municipal bonds under a cloud of uncertainty regarding bondholder rights. And to what end? Bankruptcy will cost U.S. taxpayers without providing meaningful benefit to Puerto Rico’s residents.

“The rush to bankruptcy urged by the Commonwealth should be discouraged,” AFGI states.

KBW: Prepa Deal Positive for Local Banks

An agreement reached late last year between the Puerto Rico Electric Power Authority (Prepa) and its monoline insurers is a significant step forward in the electric utility’s restructuring and a positive for local banks with Prepa exposure, investment bank Keefe, Bruyette & Woods (KBW) said in its latest North America equity research report.

“The next step in the process should be for the governor [Alejandro García Padilla] to call a special session of the legislature to pass the Prepa Revitalization Act, which is also required under the restructuring agreement,” KBW’s Brian Klock and Glen Manna said in their latest equity report.

The restructuring agreement includes holders of 70% of Prepa’s $9 billion debt. The Ad Hoc Group of Prepa Bondholders, fuel line lenders and the Government Development Bank (GDB) had previously agreed to terms with Prepa.

Local banks with Prepa exposure include OFG Bancorp (OFG, $200 million), First BanCorp (FBP, $75 million) and Popular Inc. (BPOP, $75 million).

The KBW financial analysts pointed out that getting the monocline insurers on board with the restructuring was required by the preliminary restructuring agreement released last month.

“Another major step in putting the restructuring agreement in force is the enactment of the Prepa Revitalization Act by the Puerto Rico legislature. The governor has yet to call a special session of that body to address the bill,” the KBW equity research report said.

While implementation of the of the restructuring plan still requires passage of the Prepa Revitalization Act, Klock and Manna indicated they believed an agreement with the creditors brings the Prepa situation one step closer to resolution.

“We view this as a positive for OFG, FBP and BPOP,” the KBW financial analysts said.

By José L. Carmona

By José L. Carmona

Prepa reaches restructuring deal with two insurers

SAN JUAN – The Puerto Rico Electric Power Authority (Prepa) announced Thursday, Dec. 24, that it has reached an agreement with two of its monoline bond insurers, bringing them onboard the restructuring support agreement (RSA) that already includes a majority of its other main creditor constituencies.

Out of the three Prepa monolines — MBIA’s National, Syncora and Assured — only Syncora remains out of the deal. In all, the restructuring accord now includes holders of 70% of Prepa’s roughly $9 billion debt. A group of Prepa bondholders, fuel line lenders and the Government Development Bank (GDB) had previously agreed to restructuring terms with Prepa.

Sources had told Caribbean Business earlier this week that the utility had been ironing out final details on a term sheet with the monolines that could bring them into the fold. Several deadlines under the RSA had been extended until Dec. 23, including a drop-dead date to reach a deal with the insurers.

Prepa and its creditors were also discussing how debt payments totaling about $302 million due in January would be made. The latter would include a relending mechanism, as it was done back in July when the insurers bought bridge bonds that provided liquidity to the utility and helped it meet a $415 million payment. Prepa Executive Director Javier Quintana told the Associated Press Thursday that the utility will meet the $302 million payment.

“[Prepa] would have a binding agreement with the creditor groups that also includes a relending so that Prepa can have its cash position protected and the monolines can minimize their risk. They are going to do a scoop and toss so that the Series 2015A [bonds] can be paid without a problem. Prepa would be paying those $100 million and then the monolines would be doing a relending,” a source told Caribbean Business earlier this week.

While heralding the agreement reached with the two monolines, the utility’s chief restructuring officer, Lisa Donahue, warned the RSA is still subject to various conditions and contingencies. “Chief among them are the enactment of the necessary legislation, the approval by the Energy Commission of Prepa’s rate structure and the securitization charges, execution of a successful exchange offer, and the achievement of an investment grade rating for the securitization bonds, the last of which will of course depend on a number of factors, including the overall situation at the commonwealth,” she stated.

The Prepa Revitalization Act — key legislation that would enable the utility’s restructuring agreements with its creditors — still awaits the Legislature’s consideration. Gov. Alejandro García Padilla has yet to call a special legislative session for lawmakers to tackle the bill before year’s end. The restructuring accord between Prepa and its creditors now provides for a Jan. 22 deadline to pass the legislation, Bloomberg reported. At least two separate sources have told Caribbean Business there are significant concerns over legislative support for the Prepa bill since it has been heavily amended.

“Securitization needs to happen [for the RSA to hold] and the Revitalization Act is essential to that. Without it, we would have to start from scratch with yet another deal. The creditors are giving Prepa room for the measure to make it to the floor, and they realize how messed up things are right now within the context of Puerto Rico politics. It is a complicated deal,” a source told Caribbean Business last week.

As for some of the terms under the RSA, in addition to the $700 million in debt-service savings over the next five years and a 15% haircut, or $600 million reduction in principal, in exchange for safer debt, the deal will now include bond insurers providing up to $462 million as a reserve, or surety, for the new securities. The RSA also outlines other elements of the utility’s recovery plan, including new governance standards, operational improvements, rate structure proposal and a capital plan, according to Prepa.


Caribbean Business Online Editor Eduardo San Miguel Tió contributed to this report.