Thursday, August 14, 2014

Prepa gets lifelines from banks and bondholders in exchange for reforms

Creditors are allowing Prepa to again postpone payment of $671 million worth of loans until next year. The utility owes Scotiabank $525 million and Citigroup $146 million and had faced a previously extended payment deadline Thursday.

The banks that provide revolving lines of credit for fuel purchases and other operational costs will extend until March 31, 2015 agreements to not exercise remedies as a result of credit downgrades. Prepa will continue to delay certain payments that were due to these lenders in July and August but will continue to make all scheduled payments of cash interest.

Investors holding and insuring more than 60 percent of its outstanding debt have agreed to amend bond documents to provide the utility with liquidity and time to “develop a plan to achieve a restructuring of its business.”

The insurers and bondholders will not exercise remedies against Prepa during the term of these agreements, and the utility will continue to make required debt service payments in full. It is reportedly facing repayment of $214 million to bondholders on January 1.

Under the terms of the agreement, Prepa will have to appoint a chief restructuring offer by September 8 and complete a full debt restructuring plan by March 2, 2015.

The chief restructuring officer will work with the utility’s executive director and its board to “speed up the transformation of the public corporation,” Prepa said in a statement

Prepa said it is committed to drafting a five-year business plan by mid-December.

“Today’s agreements give Prepa the additional time and financial resources we need to reach a comprehensive solution that ensures our ability to provide a safe, reliable and efficient power supply to all Puerto Ricans for many years to come,” Prepa Executive Director Juan F. Alicea Flores said in a statement.

The utility, which tapped its capital fund for $100 million in May to buy fuel, said it will make full debt-service payments during the term of the agreements.

“Today’s announcement is an important milestone in the transformation of Prepa and gives us a clear line of sight to the future,” said Harry Rodríguez, who chairs Prepa’s board of directors.

The announcement comes amid growing speculation that Prepa might default on its $9.3 billion debt.

Investors and analysts have worried that the maturing bank lines could push the troubled government electric utility into default and subsequent debt restructuring. Standard & Poor’s has said Prepa lacks the cash to repay the loans.

Prepa is widely expected to be the first public corporation to file under the recently enacted Puerto Rico Public Corporation Debt Compliance & Recovery Act (Recovery Act). Even government officials have said that the law, hurriedly approved in late June, was tailored for Prepa over concerns that it might be forced into default this summer if negotiations with its bankers failed.

While government officials continue to hold out hope that Prepa and other public corporations can avoid default, investors and analysts are increasingly convinced that both Prepa and the Highways & Transportation Authority will have to go through restructuring.

Prepa has combined operating losses of $1.022 billion during the past four years, with the public corporation losing $275 million in fiscal year 2013 and $346 million in fiscal 2012. It falls below utility-industry performance benchmarks in a wide range of areas and fails to employ standard industry practices aimed at holding down costs and assuring operational efficiency, according to a November 2012 report by consultants Álvarez & Marsal commissioned by the GDB.

The report found Prepa was worth about half its outstanding long-term debt. Its preliminary value range for Prepa was $3.5 billion to $4.1 billion at a time when its net debt was $6.9 billion. Today, its debt is $9.28 billion.

Mutual funds mounting a legal challenge against the Recovery Act are aiming to amend their lawsuit to include arguments that Prepa could meet its obligations without defaulting on its debts to bondholders.

The timeframe of federal court proceedings in the legal challenge of Puerto Rico’s new Recovery Act is taking shape as a federal judge in Puerto Rico ordered both sides the make their cases by October.

The Recovery Act allows ailing public corporations to restructure their debts through a bankruptcy like process in local courts. The law provides two avenues for the public corporations to restructure their debt. A Chapter 2 filing would allow public corporations to create plans that postpones or reduces debt service payments with the consent of a majority of creditors. A Chapter 3 filing would allow public corporations go through the local courts if voluntary repayment plans cannot be reached with a majority of creditors.

The plaintiffs filed their lawsuit against the Recovery Act in the U.S. District Court in San Juan in June arguing that the Puerto Rico law is unconstitutional and that only Congress has the power to pass bankruptcy legislation. Franklin Funds holds $907.1 million in Prepa bonds and Oppenheimer Rochester Funds holds $821.4 million in Prepa bonds. They lodged an amended suit this week to include arguments that government power utility could meet its obligations without defaulting on its debts to bondholders.

The plaintiffs say Prepa has other avenues to shore up its finances including: raising rates; the Puerto Rico government could repay over $640,000,000 it owes to the utility; the commonwealth could reduce Prepa’s taxes and subsidies which the brief asserts amount to over $1 billion from 2014 through 2018; Prepa should collect its full accounts receivable and pay subsidies after debt service instead of permitting customers to offset subsidies from their payments; Prepa should cut costs and address inefficiencies; and should strengthen its capital markets reputation by hiring an investment banker and making public presentations.

“The ease with which the numerous alternative solutions could be implemented underscores that the Recovery Act is not reasonable or necessary to serve any public purpose,” the funds said.

The second amended complaint reiterates that a Prepa filing under the Recovery Act is both “probable and imminent.” The summary judgment motion seeks summary judgment on two of the plaintiffs’ claims: that the Recovery Act is constitutionally and statutorily preempted, and that the Recovery Act’s automatic stay provisions are illegal to the extent they purport to preclude a federal court action. The motion asserts that these two claims are “purely legal, and will not be clarified by further factual development.”

Prepa recently acknowledged it was in talks with 60 percent of investors holding and ensuring 60 percent of the bonds in circulation, as well as with banks providing a credit facility to buy oil to produce electric power.

A $20 billion New York-based hedge fund, Blue Mountain Capital Management, filed a second lawsuit in late July, calling Puerto Rico’s restructuring law an attempt to “erect an unconstitutional bankruptcy regime” to subvert the contractual rights of investors.

The commonwealth government and Prepa are seeking to have the lawsuits dismissed. They argue that because Prepa has not filed under the Recovery Act there is no case or controversy to adjudicate.

In defending the constitutionality of the Recovery Act, the government lawyers are highlighting the fiscal crisis affecting Puerto Rico and the right of the commonwealth government to use its “police powers” during what they describe as an “emergency situation.”

They also emphasized that the Recovery Act provides similar treatment to creditors and establishes similar procedures to federal bankruptcy law in arguing that this is a legitimate move by Puerto Rico to resolve its fiscal situation, just as other jurisdictions stateside like Detroit have undertaken.

The Puerto Rico Electric Power Authority has struck deals with bondholders and creditors that will give it liquidity but require a restructuring of the ailing public utility.

Prepa gets lifelines from banks and bondholders in exchange for reforms

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