Puerto Rico board cuts four entities' debt payments

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The Puerto Rico Oversight Board approved a plan to cut Puerto Rico Aqueduct and Sewer Authority debt service by 35% through 2026, while postponing a decision to throw the territory’s debt restructuring into a bankruptcy process.

Friday's decision on PRASA was the first time since the onset of the Puerto Rico debt crisis that it was acknowledged that the authority would have to restructure its debt. In December its leaders told the board that it didn’t have the money to pay all its obligations without additional steps being taken.

As of February PRASA had $4.6 billion in bonds and private loans outstanding, according to a board document. Through fiscal year 2026 the authority contractually owes $3.3 billion in debt service, of which Friday’s approved fiscal plan calculates it can pay $2.1 billion.

On Friday morning the board directed the authority to amend its plan in several ways, including by mandating regular rate increases on all of its customers over the next few years. The new residential rates must be variable by income, the board required.

The board amended the plan to call for the authority to optimize its operating structure and to take steps to reduce non-payroll expenses partly through cooperation with the Puerto Rico Electric Power Authority. These amendments would change the amount of cash available for debt service, potentially reducing the 35% cut in debt service. The amount of change is unclear, board member Carlos García said after the meeting.

The board voted to allow itself to go into executive session from the end of the meeting to the next public meeting to consider consensual debt restructuring agreements or to put the handling of debt restructuring into the hands of a federal court. The former would be under section 206 of Puerto Rico Oversight Management and Economic Stability Act and the latter would be through the act’s Title III.

According to Jubilee USA executive director Eric LeCompte, the board was meeting in executive session on Friday afternoon to decide whether to put the debt restructuring process into Title III.

The board has set the end of a debt litigation stay on Monday and PROMESA prohibits its extension. Market participants have speculated that the board would put the matter into Title III bankruptcy process rather than open the door to what one public finance attorney said would be a legal “meltdown.”

The board also approved the fiscal plans of the Puerto Rico Electric Power Authority, Government Development Bank for Puerto Rico, and Puerto Rico Highway and Transportation Authority, after amending the plans for PREPA and HTA.

The approved HTA plan assumes that the authority will pay no debt service at least through fiscal year 2026. As of February the authority had a total of $4.1 billion in debt outstanding. The approved plan doesn’t indicate how much of this is due through fiscal 2016.

However, it indicates that even after the plan’s measures are taken it expects the authority to have a net deficit of $487 million through the years. This is partly due to an assumed Puerto Rico government claw back of authority revenues for the government’s debt. Through at least fiscal year 2025 the “PRHTA will require support from the Government of Puerto Rico to maintain essential operations and expenses,” the approved fiscal plan says.

As has been discussed for months, the board decided to wind down the GDB with most of its “footprint contraction” taking place in the next two to three years. The approved fiscal plan projects that the bank will have enough cash flow to pay 49% of its contacted debt service through fiscal year 2026. As of February, the bank had $4.1 billion in outstanding bonds, loans, and unpaid principal and interest.

Finally, the board amended PREPA’s fiscal plan to direct it to have an “average all-in” rate of 21 cents per kilowatt-hour by 2023. This rate could be higher if fuel costs were greater than projected. The board directed PREPA to take steps towards this goal and specified steps outside of additional cuts to paying its debt.

The board’s amendment didn’t specify whether this rate would include the planned transition charge to support the authority’s debt.

PREPA had about $8.3 billion in bonds and about $700 million in loans as of February. The authority is very near to signing a restructuring agreement with bondholders and other creditors.

"The PREPA bondholders are supportive of the plan to improve the operations of PREPA," said a source close to PREPA's creditors. "We look forward to continuing to execute the Restructuring Support Agreement as agreed upon."

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