Puerto Rico’ Electric Power Authority (PREPA) and Government Development Bank late yesterday entered into a debt strategy agreement for PREPA with owners and insurers of more than 60% of PREPA’s bonds and banks that have loaned PREPA monies to operate. More than $5 billion of PREPA’s $9.263 billion in debt is covered by the agreement.
The accord prevented PREPA from having to default on repayment of $696 million in credit lines that the banks extended the utility that was due yesterday.
It also came after PREPA failed to make required Bond Service and Redemption Accounts deposits on July 25th — a default which it did not publicly acknowledge until yesterday.
The strategy, further, is an alternative to PREPA seeking to reduce its obligations under a controversial new Commonwealth law hurriedly proposed by Governor Alejandro Garcia Padilla (‘Commonwealth’ party) June 25th and passed by the Legislative Assembly on a party line vote the same day.
The law was enacted because PREPA was due to start repaying the credit lines July 3rd and the Government knew that it would be unable to repay the loans. The banks earlier delayed payment deadlines until yesterday.
The law prompted Franklin and Oppenheimer Rochester bond funds and the Blue Mountain hedge fund to sue the Government of Puerto Rico in Federal court in Puerto Rico, claiming that it violates the U.S. Constitution’s Contracts, Takings, and Bankruptcies Clauses and is pre-empted by the Federal Bankruptcy Act — assertions that the Government rejected, claiming its Commonwealth authority.
Yesterday’s agreement includes the funds that went to court over the law.
Under the agreement —
- Citibank and a group headed by Scotiabank have extended PREPA’s operations credit lines primarily used to buy the oil used to produce most of the territory’s electricity until March 31st. PREPA will pay the banks the banking world’s variable ‘Alternate Base Rate’ interest rate plus 4% for the loans. The other banks in the Scotia group are Oriental, Popular, and FirstBank.
- PREPA will name a Chief Restructuring Officer in consultation with the bondholders by September 8th.
- PREPA will hire FTI Consulting, which will consult with the bondholders in preparing a ‘best practices’ operations restructuring report by November 15th.
- PREPA will produce a five-year business plan by December 15th.
- A plan to restructure debt will be agreed upon by March 2nd. Holders and/or insurers of two-thirds of the bonds represented in yesterday’s agreement must agree for the plan to become effective.
- PREPA will continue to pay principal and interest on its bonds. It will not make deposits into its bond Revenue and Sinking Funds but will pay some $170 million into a special “defeasance” fund by January 1st, when the next bond interest payment is due.
- PREPA will be able to use $280 million in construction funds generated by bond sales for current expenses. This will eventually be repaid into the construction fund. It was said that the temporary use would not delay conversion of costly oil-fired electricity generation to more economical natural gas.
- PREPA will not have to pay principal or interest on its $40 debt to the Development Bank during the period of developing the restructuring plan.
- PREPA will provide all parties with weekly, monthly, and quarterly confidential financial information.
- PREPA will pay the bondholders a delay fee of $1.4 million and a bond amendment fee of $1 million per month.
The plan will result in bondholders being paid substantially less than the face value of their bonds but almost certainly also economies affecting PREPA workers, suppliers, and others.
Below is a link to PREPA’s disclosure regarding the agreement that was filed with the Municipal Securities Rulemaking Board.