Creditors for the Puerto Rico Electric Power Authority extended forbearance for two more weeks in hopes of ironing out differences over a business plan that currently indicates a restructuring of debt.
"We continue to work with creditors towards a consensual resolution and the transformation of PREPA for the benefit of all stakeholders," PREPA chief restructuring officer Lisa Donahue said in a press release announcing the extension to June 18.
The plan to restructure came in a public report that accompanied a private business plan PREPA submitted to its creditors on June 1. The authority, which owes $9.2 billion including $8.4 billion of bond debt, has been operating under forbearance since August as it works with creditors to craft the new business plan.
According to the original forbearance agreement, the business plan wasn't expected to include measures concerning PREPA's existing debt. However, in "PREPA's Transformation: A Path to Sustainability," the authority said "the existing [electricity] rate structure is not sufficient to cover costs and current debt service requirements, but the rate deficit cannot be borne by the ratepayers alone. Closing the rate deficit will require equitable burden sharing across all stakeholders."
Other parts of this report indicated that PREPA considered the creditors to be among the stakeholders.
The alteration of bond payments may be at sums newly agreed upon by PREPA's creditors. However, Standard & Poor's has said it would look at such a restructuring as a default.
"PREPA's Transformation" indicated that in fiscal years 2016 to 2018 after cuts in spending are instituted, unless changes are made there will be a shortfall of money equivalent to what it would receive from a 6.2 cents increase in the electricity rates. This "burden" should be "shared" between the stakeholders, the report stated. PREPA consumers currently pay 21.4 cents per kilowatt hour.
In the report PREPA suggests that increasing electrical rates do not always lead to similar percentage increases in revenues. Increasing rates can prod people to conserve electrical use and this seemed to have happened from 2005 to the present in Puerto Rico, the report suggested.
On Friday afternoon in Bank of America Merrill Lynch's Municipals Weekly, head of municipals research Phil Fischer pointed out that a timeline in "PREPA's Transformation" indicates that in September the authority plans to "commence exchange offer/consent solicitation for bonds and banks." Fischer wrote, "The authority is, in effect, telling the market what the market already expects: PREPA will default on [the] 1 July debt service payment."
The bondholders see both good aspects and problems with PREPA's proposed business plan, according to a person in the group. "From our perspective now, we're just putting our heads down and working," he said Friday morning.
On Tuesday Bloomberg reported that some of the bond insurers holding PREPA debt were considering ending the forbearance and turning to the legal system to handle the authority and its debt. While the insurers may have had some trepidation about the forbearance, it was also possible, that the threat to exit the forbearance was intended to pressure PREPA in negotiations, the person said.
"I don't know if it's good or bad," H.J. Sims senior credit analyst Dick Larkin said of the continued forbearance. "It's better than saying, 'we're not paying on July 1 [when the next bond payment is due].'"
While the bond trustee, U.S. Bank National, has said that there is inadequate money in the debt service reserve to make July 1's $400 million payment, that does not mean it will not be paid; PREPA's liquidity improved from October to March, Larkin said.
On May 30 the chairman of the Puerto Rico House of Representatives Committee on Small and Medium Businesses, Commerce, Industry and Telecommunications said if PREPA were to propose a rate increase, his committee would urge ending PREPA's monopoly of providing electrical power in Puerto Rico.
Aponte Dalmau's committee has been holding hearings on PREPA.
Aponte Dalmau said that the authority's financial consultants and consulting engineers had engaged in a "scheme" that allowed continued sale of debt used largely to pay back old debt. The credit rating agencies also were guilty in being insufficiently critical of the authority's behavior in the past decade.
Speaking on behalf of the committee, Aponte Dalmau said, "We find that such scheme was for the sole benefit of the financial community pursuit of security issuers' fees and not for the general welfare of the people of Puerto Rico. We preliminarily find that such debt issues contain illegal provisions that violate federal law. We find that as a result of this financial practice, the authority became victim of 'deepening insolvency.'"
The authority's executive directors and board members were not sophisticated enough to have mounted such a scheme, Aponte Dalmau said. He said the committee would oppose any increase in the electrical rate.
Normally, any increases in PREPA electrical rates would have to be approved by the Puerto Rico Energy Commission and not Aponte Dalmau's committee.
Aponte Dalmau made a variety of charges against the authority's financial advisors, chief engineer, ratings agencies, investment banks, and investors. For example, he said, "Even though PREPA's auditors, the residential, commercial and industrial sector of Puerto Rico and the environmental agencies publicly noted the continuous weakening of the authority's financial, competitive and obsolete condition, the credit rating agencies continued to classify PREPA's debt with an investment grade rating."
Aponte Dalmau is a member of the Popular Democratic Party with the Governor Alejandro García Padilla. His letter is based on the preliminary positions of the committee. The committee will arrive at its final recommendations by around June 20, said committee director Jesus Rosario.
