Puerto Rico Electric Power Authority's forbearance arrangements with creditors reinforce banks' claims of priority over bondholders in getting repayment and make it more difficult for bondholders to force increases in PREPA rates.
PREPA entered into a forbearance agreement on Aug. 14 with bondholders and insurers representing more than 60% of the distressed utility's outstanding revenue debt. Also in mid-August PREPA signed forbearance agreements on bank lines of credit with banks and on other credit facilities with the Government Development Bank for Puerto Rico.
PREPA has about $8.3 billion in bonds outstanding and has signaled it will restructure its debt in March. Under the first agreement, the bondholders gave up their rights to sue PREPA for at least several months and signed non-disclosure agreements.
The forbearance agreement with bondholders and insurers includes two references to "the priority of repayments of the Citibank/Scotiabank lines of credit relative to the bonds," while noting that the bondholders and the banks will retain the "right to contest or defend" this priority.
PREPA's agreement with Citibank also says that the bank will retain the ability to defend its lines of credit as "priority rights" because the lines support "current expenses" used for operating expenses.
The prioritization of the banks continues the treatment found in a Aug. 2013 official statement for PREPA's most recent bond sale. "The debt service payments on [the bank operational] lines of credit are current expenses payable prior to debt service on the authority's power revenue bonds," the statement said.
At least some of the older PREPA official statements didn't contain this language.
A bankruptcy attorney familiar with the PREPA forbearance situation said that the structure of a revenue bond requires "operational expenses" to be paid before bondholders. PREPA uses the bank money to pay for fuel necessary to keep the utility running. While this isn't a Chapter 9 bankruptcy, the parties are relying on the same structure, which would mandate prioritizing those repayments to keep the lines of credit open, the attorney said.
"There's a recognition that current operating expenses have to be paid," he said.
According to PREPA's forbearance agreements with the bondholders and the banks, PREPA owes $8.3 billion in revenue bonds and $696 million to Citibank, Scotiabank de Puerto Rico, Banco Popular de Puerto Rico, Oriental Bank, and Firstbank Puerto Rico. In the case of all the banks except Citibank, Scotiabank is serving as the agent on a line of credit. Scotiabank is agent for a $550 million line of credit and Citibank has a $146 million line of credit.
Reduced Power to Force Rate Increases
Also on Aug. 14 PREPA made changes to its bond-governing agreement that make it harder for bondholders during the forbearance period to start a legal process to force rate increases. The forbearing bondholders approved these changes.
The 1974 agreement with the bondholders that governed the bonds said that PREPA would adjust rates so that revenues, at a minimum, would be equal to at least the system's current expenses plus a level covering at least 120% of aggregate principal and interest payments. If the authority didn't adjust the rates to meet these requirements and if 10% of the bondholders requested the bond trustee to take action, then the trustee was to sue the authority in court to increase the rates.
In the back section of the recent forbearance agreement with bondholders, there is a supplemental agreement with them that adds and amends the 1974 agreement. It still threatens a bond trustee lawsuit if PREPA's revenues don't reach the levels demanded by the 1974 agreement. However, it specifies that holders of the majority of the par outstanding will have to contact the trustee before the trustee would file such a suit.
A key passage in PREPA's forbearance agreement with the bondholders requires that they forbear from directing the bond trustee to exercise rights under the bond-governing agreement due to certain technical defaults. Among the defaults specified are the one in the section of the 1974 agreement concerning minimum revenue levels, which is being amended.
Since at least 60% of the bondholders are party to the forbearance agreement, by shifting the amount of bondholders necessary to start a suit to force rate increases to more than 50% from 10%, PREPA has effectively prevented any suit to force a rate increase until the end of the forbearance agreement. The agreement is currently scheduled to end in late March 2015.
PREPA has said it intends to introduce a restructuring plan in early March. It is possible that the plan will further alter the terms that allow bondholders to take actions to force a rate increase.
Additional Forbearance Agreement Provisions
The forbearance agreements have several other important provisions.
They say that if PREPA files for the protection of the Public Corporations Debt Enforcement and Recovery Act for restructuring during the forbearance period, the forbearance agreement would be voided.
The forbearance agreement with the bondholders is to be governed by New York law while the amendments to the bond agreement are to be governed by Puerto Rico law. Any dispute over the agreements is to be heard in either a Commonwealth of Puerto Rico court or the United States District Court for Puerto Rico.
In the authority's agreements with the bondholders, insurers, and with the Puerto Rican banks, all parties waived the right to have their disputes heard by a jury. This provision is not found in the agreements with Citibank and the GDB.
According to the forbearance agreement with the bondholders and insurers, as of mid-August National Public Finance Guarantee insured $1.4 billion in authority bonds, Assured Guaranty insured $940 million, and Syncora insured $213 million.
The bondholders' forbearance agreement lists the forbearing bondholders on
