PREPA Seen as Likeliest to Restructure

Puerto Rico officials are signaling that the power authority known as PREPA, with $8.7 billion of debt, is the most likely of the island's largest eligible public corporations to restructure its obligations under the commonwealth's new Recovery Act.

"No public corporation has sought relief under the Recovery Act," allowing restructuring of their debt, the commonwealth said in its quarterly financial report Friday. "In light of the Puerto Rico Electric Power Authority's current liquidity constraints, however, PREPA may need to seek relief."

The Puerto Rico Aqueduct and Sewer Authority has ruled out using the act and, in an investor call Thursday, Government Development Bank senior vice president Natalia Guzmán said the Puerto Rico Highways and Transportation Authority is working to avoid its use. She gave no such assurances about the Puerto Rico Electric Power Authority, saying it still faces significant fiscal and financial challenges that must be addressed in the near term.

"PREPA is in active discussions with several key stakeholders to reach a consensual agreement to fix its budgetary and operational shortfall," she said.

PREPA bond yields soared earlier this month after the government enacted the Recovery Act and the authority disclosed that it drew on its debt reserve fund to make a $418 million bond payment due July 1. A default by PREPA would be by far the largest default on bonds in United States municipal history.

Among PREPA's challenges, according to Guzmán, are $696 million in revolving credit facilities due by Aug. 17, significant operating shortfalls, high electrical rates compared with the United States mainland, significant capital expenditure needs, high levels of debt, burdensome environmental regulatory regulations, and limited fuel diversity.

Guzmán said that PREPA expects to reduce operating expenses by $70 million annually.

Guzmán said PRASA revenues were up 50% in fiscal year 2014 in the aftermath of a 60% increase rate increase instituted part-way into the year and that its collections are consistent with projections.

PRASA expects to have enough funds to meet obligations, including the payment of a bond anticipation note of $200 million due in the first quarter of calendar 2015, Guzmán said.

She said the PRHTA was still experiencing operating deficits. However, the government in June shifted the authority's money-losing mass transit operations into a new Mass Transit Authority. In early July the government decided to increase San Juan's Urban Train subway fare by 50%, returning the fare back to the fiscal year 2010 level.

Gov. Alejandro García Padilla has told the GDB to develop a plan to address the PRHTA's financial challenges without using the Recovery Act to restructure the debt, Guzmán said.

GDB executive vice president José Coleman-Ti- said during the conference call that agencies are only to use the Recovery Act as a last resort. Only PREPA, PRASA, PRHTA, and the Convention Center District Authority are eligible. The last authority has a comparatively small $423 million in debt outstanding, all of it bonds.

Coleman-Ti- said that public corporations in the U.S.A.'s 50 states have the option of bankruptcy reorganization of their debts. The United States Supreme Court has said that sovereigns have the right to introduce bankruptcy legislation, he said, suggesting the governor fit this category.

Without the Recovery Act, Puerto Rico's electricity provision could be threatened in a PREPA financial crisis, he said. Any electrical cutoff would not only be dangerous for island residents but would hurt the economy and thus ultimately the interests of bondholders of Puerto Rico bonds. The Recovery Act provides strong protection to trade creditors to prevent any electrical or other public corporation service cutoff.

As part of the government's efforts to present the general health of its financial situation, Secretary of the Treasury Melba Acosta Febo said that the government's General Fund deficits have shrunk from $2.4 billion in fiscal year 2012 to an expected $0 in the current fiscal year.

In response to a question, Acosta Febo said she was "very confident" that the courts would decide in favor of the government's position in its court battle with Doral Financial Corp. Doral is seeking $229 million from the government and the government says that it owes Doral nothing.

Acosta Febo explained that that the government responded to an unexpected April shortfall in revenues by pushing $355 million in spending from fiscal year 2014 (which just ended) to future years. These included $247 million in debt service to the GDB, $84 million in retirement systems contribution, and $32 million in rent payment to the Public Buildings Authority. The government will pay off these debts in the coming years, she said.

GDB chairman David Chafey said the ratings agencies had misunderstood the Recovery Act when they cited it as a reason for broad downgrades of Puerto Rico government credits. Despite the lowered ratings, because of Puerto Rico's actions, commonwealth officials believed that it could still access the debt markets, he said.

In fiscal 2015 Puerto Rico plans to sell a tax and revenue anticipation note by the end of September, Chafey said. It also plans to selectively access the market as conditions allow improving flexibility, refinancing short-term maturities, and further expanding the commonwealth's liquidity horizon.

On a more technical note, GDB interim president José Pagán said the GDB's financial status had improved to June 30 from Dec. 31, 2013. In the period, the market value of its investment portfolio has gone up $500 million or 18%. As of June 30 98% of the portfolio was rated A-minus.

The portfolio's average life span has gone down to 0.8 years from 2.64 years in the same period.

Total deposits at the GDB have increased by $837 million in the last six months, Chafey said. In the period the GDB's total loan portfolio has been reduced by 11.3%. Of its $8.84 billion in loans outstanding $40 million is to PREPA, $81 million is to PRASA, and $2.01 billion is to the PRHTA.

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