A renegotiated Puerto Rico Electric Power Authority bond exchange, set to be drafted by April 13, would force a loss of principal on all non-insured PREPA bonds.
In the new deal the parties would operate under Title VI of the Puerto Rico Oversight, Management, and Economic Stability Act whereby all the non-insured bondholders would be required to accept new securitized bonds with impaired terms. Under the deal PREPA reached in September 2015, and subsequently updated, uninsured bondholders could have continued to hold their original PREPA bonds in hopes of repayment under the original terms.
Gov. Ricardo Rosselló renegotiated the bond exchange in order to to win additional concessions as his government seeks to start negotiations on some $52 billion of debt under the oversight of a federally appointed control board. PREPA's deal covers another $8.3 billion of bond debt outstanding as of July.
Assuming final language can be worked out by April 13, under an extension of the restructuring support agreement, the Puerto Rico Oversight Board and then bondholders would have to approve it. According to Title VI, holders of at least two-thirds of each pool’s principal who vote would have to approve the modification of terms and holders of at least 50% of total principal outstanding in each pool would have to approve it.
According to PROMESA, every Puerto Rico bond issuer has at least one pool of bonds and these bonds are to be divided into different pools if they have different priorities or security features.
Late on Thursday PREPA bond-insurer Assured Guaranty released a statement supporting the agreement.
“We are pleased that PREPA, the Puerto Rico government, Assured Guaranty and other creditors have agreed to terms on modifications to the PREPA RSA that allow for full implementation and are fair to the various parties,” Chief Executive Officer Dominic Frederico said in the statement. “Consensual agreements like this one are the most efficient – and likely the only – way to put the Puerto Rico economy back on the road to recovery.”
There are three types of holders of PREPA bond debt: about $2.24 billion are insured, about $3 billion is held by member of the Ad Hoc Group of PREPA bondholders which has been negotiating the agreement, and about $3.06 billion is held by uninsured bondholders outside of this group.
In the September 2015 version of the PREPA agreement with the Ad Hoc Group, all members of the Ad Hoc Group would have taken the new securitized bonds with a 15% haircut and reduced interest payments. The remaining uninsured bondholders would have been given the option of taking the securitized bonds. For the deal to ultimately be consummated, holders of no more than $700 million of the remaining roughly $3 billion in uninsured par could have opted to hold onto existing bonds rather than accept the new bonds.
If the new deal goes forward, all uninsured holders would be required to take the new securitized bonds, whether they like it or not.
The new version of the deal retains the 15% haircut in principal. Those who chose the current interest bonds would get a 4.75% interest rate and those who chose capital appreciation bonds would get a 5.5% interest rate. These interest rates are at the high end of the rates contemplated by the September 2015 agreement.
The current interest bonds would appear to be serial bonds with maturities from 2023 to 2047. Neither PREPA nor the Fiscal Agency and Financial Advisory Authority responded to a request to confirm this. The capital appreciation bonds would have a term maturity of 2047. Amortization of principal on both bonds would start slowly in 2023 at 0.25%. It would jump to 2.528% in 2026 and then slowly increase until 2047.
The 2047 maturity is two years further than the final maturity in the previous deal. There would be no call on the bonds allowed for the first 10 years.
In this deal, like in the previous deal, the principal value of insured bonds wouldn't be cut.
The uninsured bonds would be backed by a 5% debt service reserve fund. PREPA would provide 1% of par in cash. The bond insurers would provide 4% of par in surety policies (insurance policies).
A 3.5% debt service reserve fund would back the insured bonds. Again PREPA would provide 1% of par in cash to this fund. The insurers would provide 2.5% of par in surety policies.
From seven to 14 years out, PREPA would be required to gradually replace the surety policies with its own cash.
In the earlier deal receiving an investment grade on the securitized bonds from at least one rating agency was a condition of the deal. In the new deal this is waived. Instead, PREPA is now promising to make an effort to get the highest rating possible for the securitized bonds.
PREPA “creditors” are to “consider” providing new loans for assure PREPA liquidity. PREPA needn’t agree to the deal unless it is assured of adequate liquidity.
Assured noted that in the deal it would provide surety to the securitized bonds, extend the maturity on relending bonds by five years, commit to purchase $18 million of relending bonds in July 2017, and provide $120 million of principal payment deferrals in 2018 through 2023 through purchasing new securitized bonds.
