Before all that debt can be restructured, the Puerto Rican legislature must first pass an enabling law — a law that, among other things, would lead to the island’s first increase in the base rate for electricity since 1989.
The legislature has about 10 more days to do that, according to the restructuring schedule. But already some lawmakers in San Juan are saying they will oppose the bill.
“I like to be an optimist, but it will be a challenge,” said Lisa J. Donahue, the AlixPartners managing director who is working as the chief restructuring officer of the Puerto Rico Electric Power Authority, known as Prepa.
Asked what would happen to the deal without legislative approval, Ms. Donahue said: “It would fall apart.”
“There are contingencies that must be met, and if they are not met, we’ll be back at the table,” she added, after explaining that getting the deal even this far took negotiators 15 months.
It involves an exchange of debt, with creditors accepting new bonds with an investment-grade rating and a face value 15 percent less than the junk-rated Prepa bonds they now hold. The new bonds would also have a slower payment schedule and a lower interest rate.
“Like Lisa said today, this is a good deal,” said Stephen Spencer, a financial adviser to Prepa’s bondholders, who monitored the hearing Tuesday. “There is always a point when it’s time to stop hemming and hawing and act — and at this point it’s up to the Puerto Rico legislature whether they want to pass the legislation and get this done.”
On its existing debt, Prepa has a little more than $1 billion in principal and interest due before June 30. Without the increase in electricity rates, and other provisions of the restructuring plan, it will not have enough cash to pay.
Puerto Rico just passed a critical debt-payment deadline on Jan. 1, and it managed to make some of the payments due only by defaulting on others. The defaults then prompted two bond insurers to file suit.
The governor of Puerto Rico, Alejandro García Padilla, has warned of a “race to the courthouse” in which more such creditors would sue to enforce their competing claims, leading to “litigation pandemonium.”
Prepa also owed debt payments on Jan. 1, but a group of its creditors helped, in effect, to finance the payments in an effort to keep the fragile restructuring plan in play while waiting for the enabling law to be enacted.
Ms. Donahue was responding to questions from a subcommittee of the House Committee on Natural Resources. It held the hearing Tuesday in response to a directive from the House speaker, Paul D. Ryan, who said in December that he wanted the House committees with jurisdiction over Puerto Rico’s affairs to come up with an appropriate solution by the end of March.
The island as a whole has roughly $72 billion of debt, most of it in the form of municipal bonds; Prepa is one of the largest single issuers.
In the past, Prepa had the authority to set its own rates for electricity. The law required it to set rates high enough to cover its costs, including borrowing costs. But that did not happen.
Instead, Prepa has held its base rate fixed since 1989, with an adjustment added on that rose and fell in tandem with the price of the fuel — mostly oil — that Prepa used to generate power.
“Because Prepa’s profit increases are linked to fuel cost increases, becoming more efficient would result in decreased profitability,” said Doug Lamborn, the Colorado Republican who headed the hearing. He said Prepa, therefore, had no incentive to shift to clean, efficient generation technology. Its plants are antiquated and do not comply with either federal or local clean-air laws.
To make matters worse, Prepa has a longstanding practice of bartering with municipalities on the island. In effect, it has gone for years without paying property taxes for its easements on municipal land, and in exchange has given the municipalities free electricity. The practice costs Prepa hundreds of millions of dollars a year.
Members of the subcommittee wanted to know, among other things, whether the prospects for restructuring Prepa might be better if it had the standing to declare bankruptcy. Currently, the bankruptcy code specifically excludes Puerto Rico from Chapter 9, the chapter that governments use to reduce debt.
Ms. Donahue said she believed access to bankruptcy would simplify the restructuring, because bankruptcy has tools for forcing holdout creditors to accept deals. She said all but 30 percent of Prepa’s creditors, with $2.7 billion of bonds, have agreed to the planned restructuring deal.
Prepa does not have to get all of those holdouts on board for the restructuring to succeed, she said — but it needs many of them, the holders of $2 billion worth of bonds.
But one of the other witnesses, Jorge L. San Miguel, said he thought “delinking” the restructuring from Chapter 9 bankruptcy was critical, because the deal was already fragile, and the possibility of bankruptcy was introducing too much uncertainty.
Mr. San Miguel, a partner in the law firm of Ferraiuoli L.L.C. in San Juan, instead called on Congress to provide external oversight to the utility.
A version of this article appears in print on January 13, 2016, on page B5 of the New York edition with the headline: Debt Plan Still Fragile for Puerto Rico Utility, Lawmakers Are Told. Order Reprints| Today's Paper|Subscribe
Asked what would happen to the deal without legislative approval, Ms. Donahue said: “It would fall apart.”
“There are contingencies that must be met, and if they are not met, we’ll be back at the table,” she added, after explaining that getting the deal even this far took negotiators 15 months.
It involves an exchange of debt, with creditors accepting new bonds with an investment-grade rating and a face value 15 percent less than the junk-rated Prepa bonds they now hold. The new bonds would also have a slower payment schedule and a lower interest rate.
“Like Lisa said today, this is a good deal,” said Stephen Spencer, a financial adviser to Prepa’s bondholders, who monitored the hearing Tuesday. “There is always a point when it’s time to stop hemming and hawing and act — and at this point it’s up to the Puerto Rico legislature whether they want to pass the legislation and get this done.”
On its existing debt, Prepa has a little more than $1 billion in principal and interest due before June 30. Without the increase in electricity rates, and other provisions of the restructuring plan, it will not have enough cash to pay.
Puerto Rico just passed a critical debt-payment deadline on Jan. 1, and it managed to make some of the payments due only by defaulting on others. The defaults then prompted two bond insurers to file suit.
The governor of Puerto Rico, Alejandro García Padilla, has warned of a “race to the courthouse” in which more such creditors would sue to enforce their competing claims, leading to “litigation pandemonium.”
Prepa also owed debt payments on Jan. 1, but a group of its creditors helped, in effect, to finance the payments in an effort to keep the fragile restructuring plan in play while waiting for the enabling law to be enacted.
Ms. Donahue was responding to questions from a subcommittee of the House Committee on Natural Resources. It held the hearing Tuesday in response to a directive from the House speaker, Paul D. Ryan, who said in December that he wanted the House committees with jurisdiction over Puerto Rico’s affairs to come up with an appropriate solution by the end of March.
The island as a whole has roughly $72 billion of debt, most of it in the form of municipal bonds; Prepa is one of the largest single issuers.
In the past, Prepa had the authority to set its own rates for electricity. The law required it to set rates high enough to cover its costs, including borrowing costs. But that did not happen.
Instead, Prepa has held its base rate fixed since 1989, with an adjustment added on that rose and fell in tandem with the price of the fuel — mostly oil — that Prepa used to generate power.
“Because Prepa’s profit increases are linked to fuel cost increases, becoming more efficient would result in decreased profitability,” said Doug Lamborn, the Colorado Republican who headed the hearing. He said Prepa, therefore, had no incentive to shift to clean, efficient generation technology. Its plants are antiquated and do not comply with either federal or local clean-air laws.
To make matters worse, Prepa has a longstanding practice of bartering with municipalities on the island. In effect, it has gone for years without paying property taxes for its easements on municipal land, and in exchange has given the municipalities free electricity. The practice costs Prepa hundreds of millions of dollars a year.
Members of the subcommittee wanted to know, among other things, whether the prospects for restructuring Prepa might be better if it had the standing to declare bankruptcy. Currently, the bankruptcy code specifically excludes Puerto Rico from Chapter 9, the chapter that governments use to reduce debt.
Ms. Donahue said she believed access to bankruptcy would simplify the restructuring, because bankruptcy has tools for forcing holdout creditors to accept deals. She said all but 30 percent of Prepa’s creditors, with $2.7 billion of bonds, have agreed to the planned restructuring deal.
Prepa does not have to get all of those holdouts on board for the restructuring to succeed, she said — but it needs many of them, the holders of $2 billion worth of bonds.
But one of the other witnesses, Jorge L. San Miguel, said he thought “delinking” the restructuring from Chapter 9 bankruptcy was critical, because the deal was already fragile, and the possibility of bankruptcy was introducing too much uncertainty.
Mr. San Miguel, a partner in the law firm of Ferraiuoli L.L.C. in San Juan, instead called on Congress to provide external oversight to the utility.
A version of this article appears in print on January 13, 2016, on page B5 of the New York edition with the headline: Debt Plan Still Fragile for Puerto Rico Utility, Lawmakers Are Told. Order Reprints| Today's Paper|Subscribe
Puerto Rico Utility’s Debt Plan Still Fragile, Lawmakers Are Told
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