The Puerto Rico Electric Power Authority’s two biggest bond insurers scored a victory in the authority’s Christmas Eve debt restructuring deal.
Whereas the authority's lines of credit holders and a group of the authority's bondholders have agreed to take delays in payments or cuts in their payments, Assured Guaranty and National Public Finance Guarantee emerged in the deal announced Thursday without having to make these commitments.
Instead, the insurers have made other financial promises to PREPA. According to a source close to PREPA, chief among these is a commitment to provide up to $462 million in surety insurance policies to act as reserves for planned securitization bonds. This will help the securitization bonds achieve the investment grades that are essential for getting the bond holders to go along with the restructuring, he said.
These two bond insurers have also promised to retroactively refinance $50 million of a roughly $200 million authority debt service payment due Jan. 4. The refinancing is contingent on Puerto Rico's government passing energy legislation sought by the creditors by the end of Jan. 22.
Syncora Guarantee has a much smaller exposure to Puerto Rico. PREPA is hoping to reach a deal with it by Jan. 23, the PREPA source said.
"MBIA and Assured Guaranty did what many observers did not believe would be possible a few months ago – they achieved a consensual agreement with PREPA in which they were not required to absorb a haircut," said BTIG analyst Mark Palmer in an email. "This is part of a trend in which the insurers' outcomes from situations of municipal distress are less dire than originally expected." BTIG has done business with MBIA and Assured Guaranty.
Assured Guaranty's stock rose 2.47% and MBIA's soared 8.81% by early afternoon Thursday.
Puerto Rico Sen. Ram-n Nieves Péres speculated that the insurers sought to avoid the haircut because they were afraid it would be a precedent for handling their exposure to Puerto Rico Highways and Transportation Authority bonds.
"While the entry into these agreements is another important milestone in PREPA's transformation, the transaction is subject to a number of conditions and contingencies," said Lisa Donahue, PREPA chief restructuring officer. "Chief among them are the enactment of the necessary legislation, the approval by the [Puerto Rico] 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."
PREPA will make the Jan. 4 $208 million bond debt service payment out of its own cash, said the source close to PREPA. Conditional on Puerto Rico's passing acceptable legislation by the end of Jan. 22, Assured Guaranty and National Public Finance Guarantee will purchase $50 million in bonds and the Ad Hoc Group of PREPA Bondholders will purchase $65 million in bonds, "refinancing" this portion of the Jan. 4 debt service payment.
Effectively, the source close to PREPA said the bond insurers have put up some money, in particular for the surety bonds, as their contribution for the deal, whereas the bond holders are accepting delays in principal payments and cuts in the interest rates, as their contribution for the deal. The lines of credit holders and the Government Development Bank for Puerto Rico have agreed to accept either an extended payment schedule plus lowered interest rates or to convert to bonds and accept the bond holder deal.
Observers had different takes on what the deal will mean for anticipated negotiations on Puerto Rico's debt.
"This is a huge step towards restructuring Puerto Rico's public sector debt," Nieves Péres said. The agreement shows that Puerto Rico is not like Argentina, which simply stopped paying its national debt in 2001, he said. Puerto Rico wants to pay its debt in a restructured form.
Palmer also saw the PREPA agreement as important precedent for Puerto Rico's debt. "The consensual agreement demonstrated that Puerto Rico's debt situation can be addressed without Chapter 9, which undermines the arguments to the contrary made by the commonwealth's government. The PREPA agreement may serve as a template for similar agreements between creditors and Puerto Rico's other debt-issuing entities."
New Oak Managing Director Triet Nguyen was not as optimistic. "We view the conclusion of the PREPA negotiations as a major positive step in addressing Puerto Rico's debt problem, although plenty of execution risk remains. Some of the collateralized debt concepts may be applicable to the 'superbond' structure being considered for the rest of the Puerto Rico debt complex.
"That said, restructuring a standalone enterprise with its own set of cash flows is relatively 'easier' than restructuring tax-backed debt, which will raise myriad legal and political issues and involve many more constituencies with conflicting goals," Nguyen said.
