Monday May Be PREPA's Turning Point

Monday may be the turning point for the Puerto Rico Electric Power Authority.

Representatives of the forbearing bondholders and the authority are negotiating a possible extension of the investors' agreement to refrain from such measures as appointing a receiver or taking over management of the authority. The agreement is currently expected to elapse at the end of Tuesday.

PREPA, which has more than $8 billion of bond debt, announced that it expects to negotiate through this weekend and make a public statement on Monday.

According to the El Vocero website, bondholders are split between a group that wishes to continue forbearing from and another that wants to attempt to seize control of the authority. PREPA chief restructuring officer Lisa Donahue and Government Development Bank for Puerto Rico president Melba Acosta Febo are seeking continued forbearance.

If the bondholders agree to an extension, then the current PREPA leadership will largely continue to run operations. The authority may have to pay Donahue and her support staff from AlixPartners to continue their activities.

Observers including Moody's Investors Service expect PREPA to default on a $400 million bond payment due on July 1.

According to people familiar with the situation, many of the forbearing bondholders believe the best way of handling PREPA is to continue to forbear and negotiate the conditions of any default. They also believe that it makes sense to lend the authority additional money so that it can make capital investments to help lower operating costs.

To continue the bondholder forbearance agreement, 60% of the bondholders may have to agree to an extension of the existing agreement or a new agreement. This threshold was met when the current agreement was approved in August 2014. The new agreement could conceivably be approved by a different group of bondholders than the August agreement.

If the bondholders don't forbear, some of them could attempt to appoint a receiver for PREPA. The 1974 Trust Agreement that would largely return to governing the bondholders if the forbearance agreement elapsed allows them to petition the bond trustee to appoint the receiver.

Section 804 of the trust agreement says that if PREPA defaults and bondholders holding at least 10% of outstanding principal ask the trustee to seek a receivership, the trustee may appoint a receiver. Only if the trustee receives a request from holders of at least 25% of outstanding principal is the trustee bound to appoint a receiver.

If the trustee were to receive requests from between 10% and 25% of the bondholders for action, the trustee could choose to take other actions beside appointing a receiver, according to the 1974 agreement.

On March 2 Municipal Market Analytics managing director Robert Donahue said in MMA's Weekly Outlook: "The existing PREPA trust indenture's receiver remedy is ambiguous and potentially quite weak. It is unclear that any PREPA receiver would even be able to raise power rates as needed to support the rate covenant."

The forbearance agreement had specified that PREPA would release a debt restructuring plan by March 2. The authority missed this deadline.

Over the next 12 months bondholders will probably forbear, PREPA will probably default, and the bondholders will probably lend PREPA more money, said Michael Ginestro, director of municipal research for Bel Air Investment Advisors. However, the bondholders will only do this if PREPA agrees to certain conditions.

PREPA must increase its base electrical rate and improve collections of its revenues, Ginestro said.

NewOak managing partner Triet Nguyen agreed on Friday an increase of PREPA's base rates is key to its financial health. "Only by raising its base rate can the utility cover both its debt service and its projected capital needs, including the costs of converting to gas generation," Nguyen said.

A negotiated restructuring of PREPA's debt would be good for all of Puerto Rico's debt, Ginestro said. It would make restructuring of other public sector entities less likely.

It is also possible that a critical mass of bondholders doesn't continue to forbear and no group of bondholders manages to appoint a receiver. The future of that path is more unclear.

A bill has been introduced in the U.S. Congress to allow PREPA and other Puerto Rico public corporations to file for Chapter 9 bankruptcy, but is moving slowly. Puerto Rico has sought to rejuvenate its own bankruptcy law developed in June 2014 after it was struck down by a federal court in Puerto Rico. It has appealed the decision to a higher court in Boston, a process that may take many months.

Finally, regardless of what happens with the bondholders and insurers (who are party to one forbearance agreement with PREPA), it remains to be seen what the forbearing banks, Scotia Bank and Citibank, do when the March 31 deadline comes. PREPA may make an announcement on the banks as well Monday.

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