The Puerto Rico Electric Power Authority still has months of work ahead to come to agreement on such issues as the maturity structure for its new bonds and improvements to its efficiency, according to a person familiar with the utility's talks with creditors.
"Yesterday was an important day," the person said, after the authority released a term sheet Wednesday with the forbearing bondholders specifying many of conditions of a bond securitization and restructuring. "It was a milestone, but there's still a lot of work to do."
As of June 30 PREPA had $9.4 billion in outstanding debt, of which $8.6 billion was bond debt. The person, who is familiar with the forbearing bondholders' strategy and positions, said one securitization topic still to be pinned down is what will be done with the bonds' maturities.
Currently some PREPA bonds mature every year from now until 2043, he said. In the negotiated deal, these bonds would be exchanged for new bonds issued by an authority outside PREPA. The new bonds would not pay any principal for five years.
The relationship between existing maturities and the maturities of the new bonds is still being negotiated with both PREPA and the bond insurers, he said.
Complete terms about maturities and other securitization details won't be arrived at for several months, he said.
The bond insurers are taking longer to reach a deal with the authority than the forbearing bondholders did because the insurers had more options to deal with PREPA than the bondholders did, the bondholder representative said.
As for PREPA's lines of credit, the forbearing bondholders support PREPA's proposal to pay off the lines steadily over seven years, he said.
What PREPA will seek to do with consumer electricity rates still remains to be determined, he said.
PREPA chief restructuring officer Lisa Donahue said in a video interview with the El Vocero news web site said that in comparing PREPA's revenue needs with its electricity rates there was a hypothetical 8 cent gap per kilowatt hour in consumer rates to be filled. "What this deal serves to do is mitigate that 8 cents. So we're starting to chip away at it," she said. "So as all the deals are done then we'll have a vision on what the shared burden is and the amount that we will go to the [Puerto Rico] Energy Commission to talk about what we believe the rate increase needs to be."
The forbearing bondholder source said he believed there was quite a bit more work that needed to be done in reforming the authority and that PREPA would have to keep on Donahue and her firm AlixPartners for many more months. "We support Lisa's efforts to make PREPA a more efficient utility for the benefit of Puerto Rico."
The forbearing bondholder source said since the start of PREPA's financial difficulties in the summer of 2014, the forbearing bondholders had considered litigation to defend their rights. They thought they would prevail in the legal system.
However, they realized there was a chance of failure. The bondholders would have to pay law firms to represent them. And there would be a delay in bond payments affecting the investors' internal rate of return.
The forbearing bondholders thought it essential in a deal with PREPA to get at least 85 cents on the dollar par value and they have achieved that, he said. This way if any of the bondholders sell the new bonds before maturity, when all factors are taken into account, they should be able to sell at or close to par, he said.
Finally, the forbearing bondholders' source explained two features of the term sheet deal.
The term sheet specifies that the securitized bonds would have a level debt service from the sixth year until their last maturity in 2043 or a few years later. A level debt service means that the annual combined payout in principal and interest each year would remain roughly the same.
This debt service structure was picked because it is believed that the ratings agencies look at it favorably.
PREPA and the forbearing bondholders settled on $700 million as the maximum for the amount of legacy unwrapped revenue bonds that could remain after the deal and still have the deal go forward. The forbearing bondholder source said this figure was picked because it is about 25% of the $3 billion of non-forbearing uninsured bonds outstanding. The $700 million figure is flexible, he said.
He said he was optimistic that the holdouts would end up having $700 million or less of the outstanding par value.
As part of the term sheet, there will be a cash offer made to non-forbearing uninsured bondholders. If the deal goes forward, this will be above the current market value of the bonds but be below 85 cents on the dollar, the source said. Since the non-forbearing holders will have this option along with the two securitization options, there is likely to be less than $700 million hold out PREPA bond debt at the end of the process, he said.
Donahue is working on creating settlement terms with the bond insurers and the holders of the lines of credit. She currently faces a deadline of Sept. 18, which is when the current forbearance ends.
