PREPA deal obstacles grow

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Political obstacles to the finalization of the Puerto Rico Electric Power Authority debt restructuring have grown in the last seven days.

On Wednesday, the presidents of the Puerto Rico House and Senate held a press conference to announce that none of the New Progressive Party legislators under them supported approving the rate surcharge part of the PREPA debt deal. The NPP holds a majority in both houses.
Most observers say that the local legislative leaders must approve the deal for it to go forward. At stake are the authority’s $8.3 billion in bond debt and hundreds of millions more in other debt as of February 2017.

On Sunday Gov. Wanda Vázquez Garced indicated in a Tweet that she also opposed the increase.

In May the administration of Vázquez Garced’s predecessor and party-mate Ricardo Rosselló approved the Restructuring Support Agreement laying down the debt restructuring terms. Specifically, the local government’s Fiscal Agency and Financial Advisory Authority was a party to the deal. FAFAA Chief Executive Officer Christian Sobrino Vega and PREPA Executive Director José Ortiz signed the deal.

This deal was amended in September.

The governor tweeted Sunday: “My position on the proposal of the bondholders of the Electric Power Authority and the increase on light: ‘We are going to protect the most vulnerable; people have paid too much and as governor I will not take actions that harm the Puerto Rican people.' ”

Puerto Rico Attorney John Mudd responded on Twitter, “Governor, FAFAA is one of the signatories of PREPA’s RSA. How will it come out of that? Could you explain how you will pay PREPA’s debt without increasing the rate? Explain to me how your position does not endanger the restructuring of PREPA?”

On Saturday FAFAA released a statement saying that the legislature’s and bankruptcy court’s approval was necessary for the completion of the deal. Since May the government has been making deal-related “arrangements,” FAFAA continued.

“Part of that process involved the preparation of working documents for a possible bill, in addition to a memo that included the terms and conditions included in the agreement announced last year,” FAFAA said. “It is important to mention that at the moment no bill has been submitted to the legislative assembly, so all working documents are subject to change.”

Evercore Director of Municipal Bond Research Howard Cure said, “Clearly, elected officials are concerned about the potential of raising rates on an essential purpose enterprise during an election year. However, the surcharge proposal is necessary to restructure existing debt.

“The plan also has to convince the market that the surcharge and the repayment of the new debt is protected in case of a future bankruptcy,” Cure continued. “The new surcharge structure is also necessary in order to issue additional debt for badly needed electric system infrastructure improvements.”

Municipal Market Analytics Partner Matt Fabian said, “It’s not an easy situation PREPA and its advisors find themselves in. The current RSA pushes risk related to population and utilization decline at least partly onto the bondholders,” he said, “If the user base contracts too much, defaults become likely, just as with any utility revenue bond.

“But if the legislature demands deeper principal haircuts, lenders might demand the pre-PROMESA RSA’s rate true-up provision that insulated bondholders against usage decline,” Fabian continued.

“In theory, the [Puerto Rico Oversight Board] should first design an operational and ownership restructuring of the PREPA assets that has broad public and political buy-in, and then wrap the debt refinancing around that. But it’s late in the game for that kind of thinking, especially when all parties want to take advantage of the current municipal market’s strength,” Fabian said.

On Thursday the Puerto Rico Oversight Board released a statement responding to the legislative leaders’ statements. Among other things, the board said, “The Oversight Board urges the Puerto Rico legislature to enact the legislation before the court hearing on the RSA. Otherwise, PREPA and the people of Puerto Rico will incur risks the legislature can eliminate.”

There has been discussions of and negotiations toward a PREPA debt restructuring since summer 2014.

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PROMESA Utilities Commonwealth of Puerto Rico Puerto Rico Puerto Rico Electric Power Authority