Fitch: PREPA Restructuring Still Probable Despite Forbearance Agreements

Fitch Ratings believes that a restructuring of Puerto Rico Electric Power Authority's (PREPA) debt obligations remains likely. The forbearance agreements between PREPA and certain of its creditors (including bondholders) signed on Aug. 14 provide only temporary relief related to PREPA's maturing bank lines of credit. The underlying terms provide minimal comfort that long-term financial compliance is sustainable. They also do little to address Fitch's longer-term rating concerns that PREPA's net cash receipts and existing funds on hand remain insufficient to meet ongoing working capital, debt service and other funding requirements.

Terms of Forbearance Agreement Point to Restructuring

The forbearance agreements fundamentally provide the collective consent of PREPA's principal creditors not to exercise any rights or remedies arising by reason of potential default under their respective agreements through March 31, 2015, and allow time for additional negotiations. Consistent with the broader agreement, the maturity date on PREPA's existing $696 million of bank loans has been extended to March 31, 2015 (from Aug. 14, 2014). The principal lending banks - including Citibank N.A. and Scotiabank de Puerto Rico - are to receive only interest payments on outstanding loans during the forbearance period, while bondholders are to be paid scheduled debt service, including payments due Jan. 1, 2015. Pursuant to the forbearance agreement with GDB, PREPA shall have no obligation to pay any principal or interest due under smaller borrowing agreements with the GDB during the forbearance period.

Certain provisions of the agreements appear designed to enhance PREPA's ability to meet near-term operating expenses and provide greater lender oversight of operations. These include requirements for detailed cash flow reporting and forecasting, relief from sinking fund requirements, relief from the aforementioned GDB payment obligations, and permitted access to construction funds for the payment of operating expenses. However, other provisions including the required submission of a restructuring plan by March 2, 2015, retention of a chief restructuring officer and the contemplated use of reserve funds for debt service payments suggest, in Fitch's view, that a financial restructuring remains probable.

Financial Performance Remains Weak

PREPA remains plagued by weak financial performance in recent years, including through fiscal 2014. For the 12 months ended June 30, 2014 PREPA reported earnings before interest and depreciation of $781 million and a net loss of ($267 million). The net loss was well above PREPA's budgeted loss of ($161 million). Poor performance for the fiscal year was further characterized by declining energy sales (3.6% in fiscal 2014), declining customers (1.5%), high concentrations of accounts receivable (25% of revenue), high fuel costs (14.99 cents/kWh) and an unwillingness to increase base electric rates.

Power Revenue Bonds Rated 'CC'

Fitch downgraded the rating on PREPA's net revenue bonds to 'CC' from 'BB' on June 26, 2014 to reflect its view of a probable restructuring following introduction of the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the Act). The rating is on Negative Watch. Any restructuring that does not result in full and timely payment of the power revenue bonds according to the original terms promised, would likely result in a further downgrade to 'C' upon agreement and 'D' upon execution.

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Fitch: PREPA Restructuring Still Probable Despite Forbearance Agreements