Standard & Ratings Services said Wednesday its ratings on the Puerto Rico Electric Power Authority (PREPA; CC/Watch Neg) are unchanged following the authority's announcement that it has reached an agreement with its ad hoc bondholder group to restructure its obligations.
In its opinion, the restructuring contemplated by the recently announced agreement would constitute a distressed exchange, and under its criteria, it would consider PREPA to be in default if this restructuring were to occur. Accordingly, if and when this restructuring occurs, it would lower the ratings on PREPA's outstanding debt to D.
The agreement calls for PREPA to pay 85% of its existing bond obligations. Bondholders will have the option to receive securitization bonds in lieu of cash payments that will pay cash interest at a rate of 4.0% to 4.75%, depending on the rating obtained, or convertible capital appreciation securitization bonds that will accrete interest at a rate of 4.5% to 5.5% for the first five years.
As part of the agreement, all of the parties to the existing forbearance agreements (excepting National Public Finance Guarantee Corp.) will extend their respective forbearance agreements until Sept. 18, 2015, in order to provide the appropriate time to work out details of a recovery and support. PREPA's next scheduled interest payment is for $14 million, due Oct. 1, 2015.
According to PREPA, the announced restructuring agreement is expected to "reduce PREPA's total debt principal by approximately $670 million, save more than $700 million in principal and interest payments over the next five years and substantially reduce PREPA's interest rate expense on the exchanged bond debt." PREPA would use the savings from this restructuring to invest in further conversion of generation assets from high-priced oil to lower-priced natural gas, and to enhance liquidity.
