The Puerto Rico Electric Power Authority and its forbearing bondholders remain far apart in their restructuring talks, with five weeks left to reach a consensus on the authority's more than $8 billion of debt.
While both sides now acknowledge that debt payments will have to be delayed or reduced, differing approaches to bond debt emerged as the forbearing bondholders
The forbearing bondholders want the bond debt exchanged into a securitized structure with two tranches. The larger tranche would have a three year principal deferral. The smaller tranche would be zero-coupon and would not require sinking fund payments until 2035.
PREPA wants most of the bond debt transformed into bonds with maturities five years further out. Interest rates would be greatly lowered for five years, assuming the authority's revenue remains weak.
The plans demonstrate that both sides have come to the conclusion that existing bond debt will have to be restructured. As recently as April 14, PREPA chief restructuring officer Lisa Donahue said that she had made no decision as to whether the authority's debt payments would have to be lowered. On April 1 the forbearing bondholders, also known as the Ad Hoc Group, offered a plan whereby all bond debt would be paid on schedule.
PREPA has said it plans for both the creditors and the authority to agree by Sept. 1 to a restructuring plan, known as the Restructuring Support Agreement. If the parties to do not agree by then, the forbearance will terminate, according to a firm representing the forbearing bondholders.
The forbearing bondholders could then go to court to seek their appointment of a receiver to run PREPA.
In an official statement, PREPA said the forbearing bondholders' latest proposal is unachievable because, "it imposes disproportionate risks on ratepayers and other creditors -- it does not share the burden. In addition to being unachievable, it is not supported by other creditor constituencies such as the bond insurers or the revolving fuel line lenders."
PREPA's proposed bond restructuring makes proposals for the forbearing bondholders, for the non-forbearing bondholders, for the insured bonds, and the bank held debt.
For the forbearing bondholders there would be no principal paid for the first five years and all maturities would be pushed back five years. Interest rates in the first five years would decline to 1%.
If PREPA's cash position is strong at points during the first five years, some of the money would be used to pay otherwise unpaid interest and principal.
PREPA's interest and principal payments would resume at contracted rates in the sixth year.
To go into effect, 100% of the forbearing bondholders would have to agree to the terms.
PREPA's plan would give the non-forbearing bondholders the option of participating in the forbearing bondholder offer. Alternately, they could tender their bonds at 70 cents on the dollar for bonds maturing in the first five years. For bonds maturing after the first five years the non-forbearing bondholders could tender their bonds at 65 cents on the dollar.
PREPA's non-forbearing bondholder plan would require approval by 70% of those who hold these bonds.
In PREPA's plan, insured bonds would be paid at existing terms. The bond insurers would commit to insure up to $1.3 billion in new tender bonds to finance the payout on non-forbearing bonds, assuming at least 70% of this group approved the offered terms and took an immediate payout. PREPA would not pay any insurance premiums on the new bonds. The bonds would have a 6% interest rate, the first five years would be interest only and principal amortization would begin in fiscal year 2021.
About the $2.6 billion of the authority's $8.1 billion of bonds carry insurance from Syncora, Assured Guaranty and National Public Finance Guarantee.
The PREPA offer also calls for $1.1 billion in new money securitization bonds to fund new capital expenditures. PREPA hopes for a 6% interest rate with the first two years paying interest only. After the first two years, there would be 15 years of mortgage-style semi-annual payments.
Additionally, PREPA's proposal is subject to its agreeing with the bondholders on non-economic terms like governance and a request for proposals for third party managers.
The forbearing bondholder group proposes that PREPA's $8.1 billion bond debt be exchanged into a securitization structure with two tranches: a $5.7 billion Tranche A and a $2.4 billion Tranche B.
This plan assumes that the securitized bonds could receive a triple-A rating from Standard & Poor's. Tranche A would pay interest at S&P's AAA municipal bond yield curve plus 150 basis points. Principal would be like the legacy bonds except that maturities would be three years further into the future.
Tranche B would be capital appreciation bonds with 0% cash interest. There would be up to 19 years of principal and interest deferral.
Assuming the bonds would receive a triple-A rating from S&P rating, they would accrete at the 28 year S&P AAA municipal bond yield plus 200 basis points. Annual sinking fund payments of 10% of final maturity amount would start in 2035 until the final maturity in 2044. The bonds would be callable at a 5% premium after 10 years. They could continue to be called at 0.5 percentage points less each year until they could be callable at par.
Participants in the PREPA negotiations had varying opinions of the proposals.
On behalf of the forbearing bondholders, Houlihan Lokey managing director Stephen Spencer said, "This proposal is the product of months of negotiations and offers a win-win compromise for PREPA and its creditors. Notably, it would result in a significant reduction in electricity rates, reduce PREPA's debt burden following the transaction, and provide debt relief through permanent, material reductions in debt service costs that result in total debt savings of billions of dollars."
Spencer continued, "Compared to PREPA's most recent proposal, this framework provides better financial terms for PREPA across the board - including lower interest rates, lower debt outstanding, and a longer and more flexible debt maturity profile."
A source close to PREPA said that the forbearing bondholder proposal "assumes, without explanation, that 90% of the bonds would opt into the exchange even though more than 30% of the bonds are insured. The holders of such bonds may not want to exchange because they are entitled to full payment from the insurers if PREPA doesn't pay. This castes serious doubt on the viability of the proposal."
Someone with the forbearing bondholder group said the Sept. 1 deadline was very important. A similar corporate restructuring could be done in a few days and so the remaining five weeks is plenty of time, he said.
Dialogue with PREPA's representatives has been slow, he said, adding that he was hoping it would improve.
The forbearing bondholders have been negotiating up to now with firms employed by the authority and Puerto Rico: Alix Partners (which employs Donahue), Millstein and Co., and Cleary Gottlieb Steen & Hamilton. This source said he was unsure how much influence the former PREPA executive director had or the new executive director will have on the negotiations.
Assured Guaranty spokeswoman Ashweeta Durani said, "While we do not support the recovery plan proposal released by the Ad Hoc bondholder group, we believe that a properly structured securitization transaction could play an important role in PREPA's recovery plan. We will continue to work in good faith with all stakeholders toward a consensual recovery plan."
The source close to the forbearing bondholders said that with small adjustments to its plan, he anticipates the insurers will support the plan.
