Puerto Rico Electric Power Authority bondholders face greater uncertainty after the utility's contract with the firm leading its restructuring efforts expired, Moody's Investors Service said in a report Monday. Moody's said, however, that a consensual restructuring probably remains the most likely outcome.
Moody's rates PREPA's debt at Caa3 and has a developing outlook on the bonds.
AlixPartners had been leading up the restructuring efforts for PREPA and its creditors. Its contract with PREPA ended on Feb. 15 – the same day that authority's chief restructuring officer Lisa Donahue resigned. The contract with AlixPartners wasn't renewed.
"We view these developments as credit negative for PREPA," Moody's said. "The absence of a restructuring firm focused on PREPA creates a leadership vacuum following two years of negotiations that enabled the utility to reach a broad agreement with bondholders on a restructuring plan and make operational changes that improved the utility's efficiency and lowered its costs."
The rating agency said that the news, however, was not unexpected.
"The Fiscal Agency and Financial Advisory Authority (AAFAF, its initials in Spanish) had recently been authorized by the commonwealth to lead negotiations with PREPA's creditors," Moody's said. "However, AAFAF and its advisor, Rothschild, have a lot on their plates with a much broader mandate, because they are also advisors to the commonwealth as well as to other Puerto Rican government entities."
Moody's added that much of the work in terms of making organizational and operational changes at the utility had already been done, with a roadmap established for further changes.
"In the meantime, AAFAF, its advisors and the new governor's staff have been evaluating the Restructuring Support Agreement (RSA), which expires [March 31], along with PREPA's resource plans and other pertinent documents. We understand that an objective of the current administration is to utilize PREPA in a way that enhances economic development for the commonwealth," Moody's said.
"For this reason, we continue to believe that a consensual agreement with bondholders and creditors remains the most likely outcome, because such a transaction would help facilitate the commonwealth's economic development," Moody's said. "This suggests that the RSA can still be executed in a form that is largely consistent with its current structure."
Moody's concluded by saying that some other developments also lent support to a consensual restructuring, including the approval of a final base-rate increase, the withdrawal of several lawsuits and the continued ability of parties to extend the expiration date of the RSA.
"That said, we note that this progress was made while PREPA had a dedicated restructuring firm. Without one, execution risk, which was already elevated, has notched up even further, particularly given the challenging economic environment within the commonwealth," Moody's said.
