The Puerto Rico Electric Power Authority said a $300 million loan it received to avert a shutdown of service starting Wednesday would only last a month.

Puerto Rico Title III bankruptcy Judge Laura Taylor Swain, after rejecting a request for a $1 billion loan on Thursday, released an order Monday authorizing Puerto Rico’s central government to lend up to $300 million to PREPA. The Puerto Rico Oversight Board and Puerto Rico Fiscal Agency and Financial Advisory Authority had requested the $1 billion loan, after lowering the request from $1.3 billion.

Discussion of Puerto Rico fiscal plan by Gov. Ricardo Rossello and Gerardo Portela Franco on January 4, 2018
Puerto Rico Gov. Ricardo Rosselló, left, and Puerto Rico Fiscal Agency and Financial Advisory Authority executive director Gerardo Portela Franco said the loan was needed to advance the island’s reconstruction and recovery efforts.

The new loan will differ from the one the board and FAFAA had requested not only in size but also because it will lack a priming lien and the interest rate will be a higher 5% per year. Repayment of the loan will have a “superpriority,” which isn't as strong as having the priming lien.

Swain ordered that the loan be used for operating expenses. The authority, in the midst of restructuring it's debt through the Title III process, is trying to avoid shutting down its system.

In a filing in PREPA’s Title III case, PREPA Chief Financial Officer Todd Filsinger wrote, “Even with $300 million of post-petition financing PREPA will only be able to continue operation in the ordinary course until late March 2018.”

Asked about where PREPA will get additional money, FAFAA executive director Gerardo Portela Franco said in a statement: “Notwithstanding the approval of this loan, PREPA will continue to explore all available financing sources in order to secure additional funding for its medium term operational and reconstruction needs…. With the approval of the credit facility, PREPA will be able to continue providing uninterrupted electrical service to communities across the island, while advancing Puerto Rico’s reconstruction and recovery efforts.”

PREPA has been seeking a Community Disaster Loan from the U.S. Treasury following last year's hurricanes.

“When we achieved the allocation of these [CDL] funds for Puerto Rico in October, the intention was to address the immediate liquidity crisis," Puerto Rico Gov. Ricardo Rosselló said Friday. "Four months after that assignment — and after the different jurisdictions have already had access to the funds under this program — Puerto Rico still does not formally have the terms under which these funds will be granted.”

Rosselló added, “The Treasury must disburse the money immediately as this is already an urgent situation.”

Swain ordered termination of the $300 million loan when all the loans have been repaid, when there is a confirmed plan of debt adjustment in the PREPA Title III case, the commitment termination date, or when the debt is accelerated by an event of default, whichever comes first.

The loan’s superpriority claim will be inferior to only the “carve out” for professional fees and any matching requirements of federal grants and loans.

Swain’s order allows the Oversight Board to approve certain amendments or waivers to the PREPA loan without approval of the court as long as the board gives notice to interested parties. Other changes would require approval of the court. Title III attorney and observer John Mudd said the latter would include any Community Disaster Loan that PREPA would attempt to enter into.

“Let there be no doubt about this; the board suffered a major defeat when Judge Swain did not approve its original [debtor-in-possession] petition [for a $1 billion loan],” Mudd wrote in his weekly Control Board Watch newsletter.

Several bondholder and bond insurer parties filed briefs criticizing the $300 million loan after the board filed its proposal for it on Friday morning.

For example, the Ad Hoc Group of General Obligation Bondholders wrote, “The commonwealth’s persistence in offering below-market terms to PREPA is also of a piece with its ongoing attempts to undercut the possibility of any private, arms-length financing for PREPA, including the financing offer recently proposed by PREPA’s bondholders. This pattern began with FAFAA’s inexplicable delay in beginning any search for private financing….

“All of this is part of a cynical effort to make the commonwealth’s liquidity appear less than it really is – to game the federal government and the commonwealth’s own creditors,” the GO group continued.

As of Feb. 2 Puerto Rico government’s central account, the Treasury Single Account, had $1.63 billion.

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