PREPA Debt Moratorium May Foreshadow Puerto Rico's Plan

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Puerto Rico Electric Power Authority's proposed partial moratorium on debt payments may foreshadow the commonwealth's strategy for restructuring the island's estimated $72 billion of debt.

As disclosed on Thursday, PREPA is seeking to push debt maturities on its $8.1 billion of bonds back by five years, during which time no principal would be paid and interest would be cut to 1%, unless the authority's cash position warrants it. Those features contrast the more common approach of simply cutting principal and interest payments. They also echo positions advocated by Puerto Rico's political leaders, including Gov. Alejandro García Padilla, who set the stage for what would be the biggest municipal restructuring in history when he said the islands debts were unpayable.

"The ultimate goal is a negotiated moratorium with bondholders to postpone debt payments a number of years," García Padilla said in his June 29 speech.

A source close to PREPA's forbearing bond holders said that's not the only reason to believe that Puerto Rico may take a similar approach to PREPA. He said all negotiations between the authority and its forbearing bondholders had been with outside advisors to the authority, including two firms that also are advising Puerto Rico and the Government Development Bank for Puerto Rico, which oversees Puerto Rico's debt.

The source said he got the impression during talks that PREPA's representatives were "trying to set themselves up for their other debt negotiations."

The two firms are Millstein & Co., whose chief executive officer Jim Millstein is advising Puerto Rico on how to restructure its debt, and law firm Cleary Gottlieb Steen & Hamilton. Cleary, which specializes in debt restructuring, was retained by Puerto Rico in the winter of 2013-2014. PREPA is also being advised by Alix Partners LLP.

Under PREPA's plan the debt of the forbearing bondholders and the debt of those non-forbearing bondholders who elected for this plan would be subject to the moratorium. Non-forbearing bondholders would also have the right to elect to take immediate payments with haircuts from 30 to 35%.

In PREPA's plan, insured debt would be excluded from these treatments.

The day after the governor's speech, GDB President Melba Acosta Febo indicated that Puerto Rico was not seeking a complete moratorium.

The El Vocero news web site on July 9 quoted Puerto Rico president of the House of Representatives Jaime Perell- as saying, "We are going to start a dialogue case by case concerning our debts to see if we can extend their payment by five years," the same period found in PREPA's proposal. PREPA made its proposal to its bondholders on June 25, though it wasn't made public until after Perell-'s comment.

Perell- is one of five prominent members of Puerto Rico's government sitting on the Working Group for Economic Recovery for Puerto Rico, which is assigned to come up with proposals for restructuring the commonwealth government's debt by Sept. 1.

"PR officials have latched on to the 'debt moratorium' concept because it allows them to play semantic games and claim they didn't really 'default' on the debt, they just postponed repayment," NewOak managing director Triet Nguyen said in an email.

However, Nguyen said he expects the restructuring of the commonwealth's debt to be very different.

"From the beginning, PREPA has always been the most straightforward candidate for restructuring (if only in a relative sense) because of its nature as a standalone enterprise with clearly definable assets and cash flows. Also, PREPA has greater incentive to work something out with creditors, because they still need access to capital to fund their capital improvement program."

The process for the GOs will probably be "much messier" and more contentious, Nguyen said. "The PREPA bondholders' appear to be missing the point that, for political reasons, [PREPA chief restructuring officer] Lisa Donahue needs to show that creditors also shared the burden, i.e. took a significant haircut," Nguyen said Friday, referring to a counterproposal by PREPA bondholders. "The implied recovery rates in the bondholders' proposals are probably still too high, from a political standpoint."

The forbearing bondholder source said he saw the political side to debt negotiations and that PREPA was trying to score a political victory by showing it could gain a certain amount of debt relief for the island's population.

"When it comes to the general obligation and related debt, we expect the restructuring negotiations to be even more influenced by local politics [than those for PREPA's debt]," Nguyen said. "Particularly when it comes to the trade-off between maintaining essential services (however defined) and pension contributions versus debt service."



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