PREPA Court Setbacks Push Off Deal Execution

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In a sign of the challenges the federal board overseeing Puerto Rico's debt workout may face, the island's power authority's deal to restructure more than $8.3 billion remains mired in litigation.

The Puerto Rico Electric Power Authority and its creditors have been moving toward a comprehensive restructuring since the summer of 2014. Business groups, unions, and businesses have challenged the deal and the Puerto Rico government's enabling legislation in seven lawsuits.

PREPA and its creditors initially "welcomed the lawsuits," thinking that the courts would validate the agreement and the enabling legislation, according to Moody's Investors Service vice president Rick Donner.

"I think they got more than they wanted," Donner said.

In PREPA's plan, a group of forbearing bondholders agreed to accept 85 cents on the dollar in an exchange for securitized bonds, waive principal payments for five years, and accept lower interest rates. They accepted these in exchange for an overhaul of the utility's business and electric rate increases. Part of the plan relied on the passage of an energy sector overhaul law, known as the PREPA Revitalization Act, in February.

Since then the U.S. enacted the Puerto Rico Oversight, Management and Economic Stability Act to help the commonwealth and investors work though the island's mountain of debt. PROMESA included provisions for the PREPA deal to go forward independently of PROMESA's Oversight Board and the courts.

The board's first acts included filing court briefs to defend litigation stays in four Puerto Rico debt cases unrelated to PREPA. In its filing the board called the ongoing litigation a "major distraction" from "negotiating fiscal plans required by PROMESA."

Though PREPA and its creditors may have wanted lawsuits, their outlook was similar to that of the board in that they wanted this process to be simple, easy, and quick; they sought consolidation of the suits into a single suit.

As the Oversight Board was getting started with its business in September, Puerto Rico courts were ruling against PREPA's consolidation request.

A source close to the PREPA bondholders said the energy sector law included language encouraging the legal system to consolidate cases. He said he was unsure why this wasn't being followed and was now pessimistic that the Puerto Rico commonwealth courts will consolidate the cases.

PREPA said in a statement Tuesday to The Bond Buyer that it "continues to defend against the various litigations asserting that Act 4-2016 (the 'PREPA Revitalization Act') is unconstitutional. PREPA is confident that the PREPA Revitalization Act is constitutional."

The bondholder source also expressed hope that the Puerto Rico Oversight Board may move the cases to a federal court or otherwise seek to influence the litigation as part of its efforts to accelerate a resolution.

As it stands now, however, the cases will be heard separately, requiring PREPA to spend more time and money fighting them, Donner and the bondholder source said.

Winning the court cases would assure bondholders that the deal's anticipated securitized bonds would be fully legal, the bondholder source said.

After hypothetically getting the positive court decisions, the bondholders would turn to the ratings agencies for a rating on the planned new bonds, the bondholder source said. The bondholders who have negotiated with PREPA are seeking an investment grade. After getting this grade, the new bonds would be issued and the PREPA restructuring process would move on.

Donner said he expected that PREPA's bond debt securitization will take place in 2017.

The court cases against the restructuring deal or the February energy law are Uni-n de Trabajadores de la Industria Eléctrica y Riego v. Autoridad de Energía Eléctrica; Thalia Cuadrado Soto v. Autoridad de Energía Eléctrica; PV Properties, Inc. v. Comisi-n de Energía; Asociacion de Industriales de Puerto Rico v. Comisi-n de Energía de Puerto Rico; Instituto de Competitividad y Sostenibilidad Economia de Puerto Rico v. Comision de Energia, and two cases with the name Asociaci-n de Jubilados Autoridad de Energía Eléctrica v. Estado Libre Asociado de Puerto Rico.

PREPA owes $194 million of interest on its bond debt on Jan. 1. As long as it seems that the deal seems on the way to be consummated, it is likely that creditor parties will lend this money to PREPA so that it can be paid on time, the bondholder source said. Since the start of debt negotiations, it has been the bond insurers of PREPA's debt that have lent the authority money to get it through due dates without default.

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