PREPA To Soon Run Out of Money Without Restructuring Agreement

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WASHINGTON –The Puerto Rico Electric Power Authority will run out of money in the first half of 2016 if it cannot get creditors to agree to a financial restructuring plan, PREPA chief restructuring officer Lisa Donahue said at a House panel hearing on Tuesday.

Donahue made her comments during a hearing held by the House Natural Resources Committee's subcommittee on energy and mineral resources on possible reforms to Puerto Rico's energy infrastructure.

"If the [agreement] terminates or we cannot consummate the recovery plan, we will be back to square one. PREPA could run out of money, fuel supply could dry up. The safety and welfare of the commonwealth and its people would be in danger," Donahue told subcommittee members. "For these reasons, consummating PREPA's restructuring is critical to the social and economic well-being of the commonwealth and its people."

The plan she referred to is an agreement between PREPA and about 70% of its creditors, which include bondholders, insurers, and fuel line credit lenders.

Under the deal, all holders of uninsured PREPA bonds will be able to exchange their bonds for new, investment grade securitization bonds at 85% of the current face amount. To date, bondholders that represent about 40% of the outstanding PREPA bonds have agreed to the exchange, according to Donahue's written testimony.

The fuel line credit lender portion of the agreement would allow the lenders a choice between two options. They could convert their current agreements into term loans, with a fixed interest rate of 5.75% per year as opposed to the current 7.25% annual interest rate on the current fuel line credit debts, or they could exchange all or part of their current credit agreements for securitization bonds with the same terms as those given to bondholders.

PREPA bond insurers will issue surety insurance policies that together could add up to $462 million that will support a portion of the debt service reserve fund for the securitization bonds.

Moody's Investors Service said on Monday that the PREPA restructuring agreement is "credit positive" for Assured Guaranty and National Public Finance Guarantee Corp., PREPA's two biggest bond insurers, "since it does not result in an impairment of insured PREPA bonds and provides for a much improved credit profile of their PREPA exposures going forward due to the planned securitization of PREPA's cash flows to debt service."

However, the agreement cannot move forward unless a number of pieces first fall into place.

Bondholders with $2.7 billion in bonds have yet to agree to the terms and about $2 billion of those bonds would have to be included in the agreement for it to work and move forward, Donahue said.

Additionally, the securitization bonds still have to achieve an investment grade rating and must be validated by a Puerto Rico court. As part of creditor demands in the agreement, the commonwealth also must enact legislation that would lay out a legal framework for issuing the securitization bonds as well as governance reforms to depoliticize and modernize the way PREPA functions.

The deadline for the legislature to act is Jan. 22.

Donahue added that a legal framework to restructure, like access to Chapter 9 bankruptcy, would "greatly help PREPA efficiently implement an agreement with creditors." If Chapter 9 capabilities were extended to PREPA and other Puerto Rico authorities, a supermajority of bondholders could bind holdout creditors and improve the deal's economics by ensuring 100% participation, she said.

Some subcommittee members also used their allotted time to touch on Chapter 9 bankruptcy protections for the territory's public authorities, although the House Judiciary Committee has jurisdiction over that issue. Extending bankruptcy protection has been a major source of controversy as Congress considers how to deal with Puerto Rico's fiscal situation.

Rep. Jared Polis, D-Colo., said he felt the committee's focus on energy was operating on the periphery of the actual Puerto Rico issue.

"I don't see how it's even possible to delink PREPA's financial challenges from Chapter 9," he said.

Rep. Raul Grijalva, D-Ariz., asked Donahue a series of questions aimed at proving Chapter 9 access may lead to a PREPA restructuring deal that is better for Puerto Rico citizens, but Donahue maintained that even with Chapter 9 she would pursue the same deal, just more expeditiously.

Jorge San Miguel, chair of the environmental law, energy and land use practice area of Puerto Rico-based law firm Ferraiuoli, testified at the hearing that reforming PREPA is a separate issue than Chapter 9.

"I wouldn't come and beg as an American citizen unless I have done everything I can and then need more," he said.

San Miguel instead proposed that PREPA should be focusing on implementing price reductions and improving stability, modernizing its operations, improving environmental protection initiatives, and promoting economic development and growth. Each of those areas of focus are completely within Puerto Rico's control and "can happen tomorrow," he said.

In a related action on Monday, Assured Guaranty issued a statement criticizing Puerto Rico Gov. Alejandro Garcia Padilla for "feign[ing] concern about the absence of a legal framework" while at the same time taking an "illegal action" to claw back the pledged revenues of bonds to pay general obligation bonds – an action that "violates the constitutional rights of the holders and insurers of bonds issued by three authorities.

The clawbacks so far have affected the revenues of bonds issued by the Puerto Rico Highways and Transportation Authority, the Infrastructure Financing Agency, and the Convention Center District Authority.

"Unlike Gov. Garcia Padilla, we believe the U.S. District Court for the District of Puerto Rico is the appropriate forum to resolve the clawback litigation," the insurer said.

"Instead of doing everything within their power to legally manage their debt, reform their government and rebuild their economy, the government of Puerto Rico has instead adopted a strategy to deliberately promote a 'crisis narrative' intended to gain retroactive access to bankruptcy from the U.S. Congress," Assured said, adding, "This strategy has worsened Puerto Rico's situation, eroded its credit and delayed prospects for recovery."

The insurer said it "will take all steps necessary to ensure that existing law is correctly applied to the debt it insures" and that "this will help protect the public's confidence in the municipal bond market, which is threatened by Puerto Rico's reversal of its willingness to acknowledge its obligations."

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