Puerto Rico Gov. Ricardo Rossell- would be taking a risk by trying renegotiate debt restructuring terms with Puerto Rico Electric Power Authority bond insurers, analysts said.
The governor and his Fiscal Agency and Financial Advisory Authority have indicated they want to renegotiate the terms to get bigger concessions from the bond insurers, Bloomberg News reported Thursday, citing people it didn't name who are familiar with the matter.
Analysts said that such an effort would jeopardize a deal already hammered out on more than $8.4 billion of bonds just as Rossell-'s government is beginning to work with a federal oversight board on a restructuring of the rest of the island's debt, which totals close to $70 billion. Some were skeptical he would take the risk.
"Since PREPA has significant capital needs, including finishing its conversion from oil to natural gas facilities, PREPA needs to be careful not to alienate the insurers," said Evercore Director of Municipal Research Howard Cure. Natural gas would ultimately be cheaper and allow the authority to charge lower rates. This would lower the island's cost of living and doing business, he said.
According to PREPA's deal with the insurers reached in December 2015, the insurers would not have to take a loss on their bonds. Instead, they would provide up to $462 million in surety insurance policies and some refinancing.
In the deal the old bonds would be exchanged for new ones.
The surety insurance policies would help the new bonds gain an investment grade. It would also allow the PREPA securitization body to issue new debt for the authority, to invest in infrastructure all observers say it desperately needs.
The authority's insurers, bond holders, lines of credit holder, and the Government Development Bank for Puerto Rico (another creditor) have been negotiating a restructuring deal with PREPA since the summer of 2014. The other creditors have agreed to haircuts on what is owed to them or extensions on when it would be paid.
However, even if some of the deal terms have been achieved, the debt deal hasn't been consummated. The debt restructuring proper hasn't happened and still faces a few hurdles, including a March 31 deadline on the restructuring support agreement.
"We're legitimately concerned that the commonwealth's administration and the oversight board may choose to let [the PREPA restructuring agreement] fall apart on the 1-yard line," Stephen Spencer, a leader of PREPA non-insured bondholders, told The Wall Street Journal.
"There may not be that much leverage to renegotiate with the insurers," Cure said. "I sincerely doubt, at this point, that PREPA would regain access to the credit markets without outside credit support."
"Gov. Rossell- understands the importance of regaining capital market access for PREPA and Puerto Rico's other issuers," said BTIG bond insurer analyst Mark Palmer. "Insofar as PREPA would require bond insurance to access to the markets, which is likely to be the case, it would be short-sighted to try to impose haircuts on the insurers." PREPA insurers Assured Guaranty and MBIA are customers of BTIG. Syncora Guarantee is PREPA's other bond insurer.
A source familiar with the matter said Rossell- hadn't proposed alternate terms to the bond insurers and that PREPA creditors believe the restructuring agreement will be put into effect in its current form.
On Thursday in a press release on PREPA Rossell- said his "public policy is clear – all government instrumentalities should focus on economic development." As part of that goal the governor announced the inclusion of four non-voting members to a new PREPA board from his government: the executive director of FAFAA, the secretary of the department of economic development and commerce, the executive director of the Public Partnership Authority of Puerto Rico, and the director of the Office of Management and Budget.
The inclusion of the non-voting members is to help focus PREPA on promoting economic development, the governor said. The governor also said he was eliminating the existing board members' $60,000 to $72,000 salary. He also added a third consumer representative to the board.
On Thursday PREPA announced that AlixPartners, which it had hired in the fall of 2014, had given notice of the end of its services to the restructuring, effective Feb. 15.
There have been signs that this might happen for a while. From the start of AlixPartners's work, many on the island had complained about they saw as its high fees. According to the El Vocero news website, AlixPartners has collected $45 million from PREPA since the start of its service. The firm, whose service to PREPA was led by Lisa Donahue, argued that it had saved the authority far more than this in current and future costs. Donahue has held the title of chief restructuring officer since fall 2014.
According to El Vocero, Rossell- said in August that he was opposed to using consultants to help the authority and in December said he would review the AlixPartners contract.
On Jan. 27 FAFAA sent out a press release that said (referring to itself by its Spanish acronym), "AAFAF, per its enabling act, is the only entity of the government of Puerto Rico authorized to negotiate and reach agreements with creditors that restructure existing public debt. Therefore, AAFAF … has informed [PREPA] that AAFAF and its financial advisor, Rothschild, will now lead the negotiations with PREPA creditors."
The release went on to say that FAFAA will "review" the restructuring support agreement that the creditors had reached with PREPA.
