PREPA Bondholder Expects Favorable Restructuring

Puerto Rico Electric Power Authority may be able to restructure its debt on terms that that are amenable to bondholders and borrow more money, an attorney for one of the bondholders said.

Matthew McGill, an attorney for the hedge fund BlueMountain Capital Management LLC, said in an interview he is hopeful a debt restructuring agreement can be reached, helped by PREPA's saving of about $1 billion a year in fuel expenses because of plunging oil prices.

BlueMountain is one of about 10 investment firms constituting the forbearing bondholder group, which has been in talks with the utility to reorganize its business. The talks started after the government passed a debt recovery act for public corporations last year. The act was overturned by a federal court in Puerto Rico earlier this year.

"I'm optimistic that a consensual restructuring of PREPA will be achieved because it is the only sensible resolution," McGill said. "The Debt Enforcement and Recovery Act, by contrast, was a coercive restructuring path."

PREPA's financial crisis became public in July 2014 when it announced on the Electronic Municipal Market Access site that it had drawn on its debt service reserve to make a July 1 bond payment. In August it announced forbearance agreements with its bondholders and other creditors.

PREPA owes roughly $8.7 billion in bonds.

"PREPA has many options to handle its debt," said McGill, who works for the law firm Gibson Dunn. BlueMountain is prepared to extend more credit to PREPA, McGill said.

PREPA needs funds to make changes to its infrastructure to get away from oil fired power generation. Once PREPA has completed the projects it will have a lower cost structure and it could return to the capital markets, McGill said.

Howard Cure, director of municipal research at Evercore, said he was skeptical that the oil price drop had helped PREPA that much, given that the declines in oil costs are passed on to consumers as electricity price cuts.

Fitch Ratings managing director Dennis Pidherny agreed that the savings are passed on to consumers, but said a drop in oil prices does give the authority space to increase bond payments and cut prices simultaneously.

PREPA has had a history of refusing to increase its base rate, though this may change.

Pidherny said that when oil price declines lead to lower electrical rates, it encourages consumption - a financial plus for the utility.

In October Natalia Guzman, advisor to the Government Development Bank president, said, "The resolution for PREPA will require contributions from all stakeholders." That suggested that consumers would have to pay higher rates and bondholders would have to accept restructuring of terms.

Bondholders are willing to invest in PREPA and view this as a key part of a negotiated settlement, someone familiar with the matter said.

If other bondholders join with BlueMountain in lending money to PREPA, this would be a big help, Pidherny said. The authority may need $253 million to build a liquid natural gas port at Aguirre, on the south coast of Puerto Rico.

The authority currently generates 61% of its electricity from oil, according to Moody's Investors Service. Opening the gas port would be a step toward increased use of gas in electrical generation. Since natural gas is much cheaper than oil, the opening would be a step to decrease the authority's operating cost, several analysts have said.

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