A new preliminary restructuring deal between the Puerto Rico Electric Power Authority and its creditors is a positive step for bondholders in a post Hurricane Maria world, according to analysts.
The settlement announced late Monday by the Financial Oversight and Management Board for Puerto Rico involves bondholders exchanging outstanding PREPA debt for two new classes of new securitization bonds. Tranche A bonds, which are expected to mature in 40 years, will be exchanged for 67.5 cents on the dollar. A second group of Tranche B “growth” bonds, which will be tied to the economic recovery of Puerto Rico and mature in 45 years, will be exchanged for 10 cents on the dollar.
The new agreement includes a 22.5% cut for bondholders on the face value of the bonds. A previous PREPA Restructuring Support Agreement, which was altered several times, would have covered the $9 billion of debt with bondholders accepting a 15% reduction in principal in exchange for new protected securities. The previous deal was rejected by the oversight board because of concerns it failed to do enough to modernize the utility and lower residents’ costs.
“The deal is very similar to the rejected RSA,” according to Puerto Rico attorney John Mudd, who said congressional pressure may have helped spur the agreement. “It is very good for bondholders.”
The oversight board said the preliminary agreement saves PREPA as much as 30% in debt service payments over the first 20 years compared with the previous RSA. The deal also increases bondholder recoveries based on electricity demand on the island. The proposal was announced five weeks after Puerto Rico Gov. Ricardo Rosselló signed legislation to partially privatize PREPA.
“We are hopeful that the terms and financial concessions agreed to with this group of PREPA bondholders can lead to a fair consensual transaction that adjusts their ultimate level of recoveries with the success of the utility,” José B. Carrión, chairman of the oversight board, said in a statement. “The Preliminary Agreement is an important milestone and a big step forward towards PREPA’s debt restructuring process, which will support the privatization and transformation of PREPA into a modern, world-class utility.”
Howard Cure, director of municipal bond research at Evercore Wealth Management, said the deal is “more draconian” than last year's proposal, which included a 15% cut in face value, though it offers some upside to the exchanged bonds if electric demands exceed the base case. He said that the extensive infrastructure damage PREPA suffered from the September 2017 hurricane combined with governmental pressure both in Puerto Rico and in Washington on how to operate the system weighed heavily on the new agreement.
“The larger cuts to bondholders compared to last year’s deal reflect the hurricane damage endured by PREPA,” said Cure. “There is also obvious tension between the Governor and the PREPA Directors on how to operate the system. It would require federal legislation to legally separate PREPA from the Governor’s control, which I think would benefit the operations of the utility.”
Assured Guaranty, which insured some PREPA bonds, reacted unfavorably to the new agreement. The largest municipal bond insurer said in a statement that the original RSA agreed to by PREPA, its creditors, two previous Commonwealth administrations and regulators prior to PROMESA should be adhered to. The company also accused the oversight board and the Puerto Rico government of spending hundreds of millions of dollars on litigation and related expenses expected to total $1.5 billion over the next six years, which will hamper efforts to achieve fiscal progress and capital market access.
“Puerto Rico’s economic recovery can succeed only with consensual agreements that honor the rule of law, make possible future capital markets access and assure a sustainable economic future for the people of Puerto Rico,” a portion of the Assured statement read. “While we remain willing and ready to negotiate agreements that achieve these goals and look forward to constructive engagement around debt restructuring, we object to the development of fiscal plans that do not make reasonable assumptions as to the issuer’s ability to meet its obligations, and do not respect the liens and constitutional debt payment priorities established under Puerto Rico law, as required by PROMESA.”
PREPA bonds rallied Tuesday after the deal was announced. In active trading, PREPA’s Series 2010 EEE 6.05% revenue Build America Bonds of 2032 were trading at a high price of 62 cents on the dollar compared to a high of 40.87 cents on Monday, according to the Municipal Securities Rulemaking Board’s EMMA website. Trading was active with volume totaling $12.685 million in 17 trades compared to $100,000 in four trades on Monday.
The PREPA Series 2010XX 5.25% revenue bonds of 2040 were trading at a high price of 61.75 cents on the dollar compared to a high of 44.25 cents on Monday, according to EMMA. Trading was active with volume totaling $25.305 million in 13 trades compared to $270,000 in five trades on Monday.
In comparison, the benchmark Commonwealth Series 2014A 8% general obligation bonds of 2035 were trading at a high of 40.021 cents on Monday compared to 38.5 cents on Monday, according to EMMA. Trading volume totaled $22.6 million in nine trades compared to $4 million in two trades on Monday.
“I don’t think it is a bad deal for bondholders,” said Shaun Burgess, a portfolio manager for Cumberland Advisors, which holds insured Puerto Rico debt. “It is hard to look at it in the context of the previous deal because Maria blew everything up…This is like a fresh start.”
Rick Donner, a vice president and senior credit officer at Moody’s Investors Service, called the agreement "encouraging because it represents a step toward reaching a final restructuring of approximately $9 billion in debt. It also helps to move PREPA further along the path toward ultimate fiscal stability and renewed access to capital markets."
—- Chip Barnett and Bloomberg News contributed to this story.