Muni Credit News September 3, 2015

Joseph Krist

Municipal Credit Consultant

It was a mixed week for Puerto Rico.


Investors were disappointed when it was announced at the start of the week that Puerto Rico’s long awaited overall debt restructuring proposal was to be delayed for one week until September 8. We viewed the announcement with some suspicion when the delay was attributed to the impact of Tropical Storm Erika. It seemed to be just another in a long line of missteps by the government in its effort to cope with its mountain of “unpayable debt”. The decision made more sense in light of later events.


The Puerto Rico Aqueduct & Sewer Authority announced Monday it had secured an extension until Sept. 15 on a $90 million credit-line payment due Aug. 31 to Banco Popular. As a part of the deal, Bank of America will assume $75 million of this debt beginning Sept. 15, with payment due Nov. 31. Popular will keep the remaining $15 million.

In a release the Authority said “PRASA achieved an extension of the $90 million credit facility maturing Aug. 31. It will run until Sept. 15 with Banco Popular, and thereafter with Bank of America, until Nov. 30. Bank of America will acquire about $75 million, while Popular will keep about $15 million.

The utility’s initial plan was to pay the $90 million credit line to Popular with part of the $750 million bond deal PRASA had to effectively cancel due to high uncertainty in the minds of investors. These included the government’s looming deadlines to deliver the five-year fiscal stability & economic development plan, and a consensus restructuring plan between the Puerto Rico Electric Power Authority (PREPA) and its creditors.

The Authority went on to say “This extension will allow the corporation to continue its process of accessing financial markets for the issuance of up to $750 million in bonds, through which we will be able to meet the payment of this credit line and other obligations, as well as the capital improvement plan on agenda.

After the utility was unable to close the $750 million bond deal, PRASA Executive President Alberto Lázaro had said PRASA would wait until the beginning of September to make another attempt at closing the deal, particularly after several of the uncertainty factors surrounding it had cleared.

Technically, the bond issuance is in a day-to-day status, which means it is waiting for the right time to go to market. Other external, but pending, issues before the issuance include the conclusion of negotiations with PREPA bondholders and the release of the commonwealth’s fiscal adjustment plan report. Once these issues are clearer, PREPA will be better positioned to sell its bonds in the market, according to PRASA’s statement.

If the utility had failed to get the credit-line extension, it could have been forced to tap its rate-stabilizer operational fund, something that, according to Lázaro, is being avoided since it could trigger a sooner-than-expected water rate hike.


Puerto Rico announced that it had agreed on terms for restructuring up to $5.7 billion of bonds late Tuesday, even though its plans to propose a much broader debt moratorium remained delayed. The restructuring plan covers only the uninsured bonds of PREPA. Its outstanding bonds have a total face value of about $8.1 billion, but of that, about $2.4 billion are insured and not part of the agreement.

The main party to the agreement was The Ad Hoc Group owns about $4.5 billion in Puerto Rico debt and comprises more than 30 funds, such as BlueMountain Capital Management, Franklin Advisors, Oppenheimer and Knighthead, among others. The group includes some who had been considered most likely to litigate.

The Ad Hoc Group will exchange all of its outstanding power revenue bonds for new securitization notes and receive 85% of their existing bond claims in new securitization bonds, which must receive an investment grade rating.  Bondholders will have the option to receive securitization bonds that will pay cash interest at a rate of 4.0% – 4.75% (depending on the rating obtained) (“Option A Bonds”) or convertible capital appreciation securitization bonds that will accrete interest at a rate of 4.5% – 5.5% for the first five years and pay current interest in cash thereafter (“Option B Bonds”).

Option A Bonds will pay interest only for the first five years, and Option B Bonds will accrete interest but not receive any cash interest during the first five years.  All uninsured bondholders will have an opportunity to participate in the exchange.  Ad Hoc Group will negotiate with PREPA in good faith to backstop a financing that will allow PREPA to conduct a cash tender for bonds held by non-forbearing creditors.

Melba Acosta Febo, president of Puerto Rico’s Government Development Bank, called the deal “an example of the promising results that can be achieved when the commonwealth and its creditors work together.” The agreement calls for an exchange of debt, according to press accounts. Current bondholders are to accept new bonds with a par value 15 percent less than the bonds they now hold. At the same time, the new bonds are to be backed by a securitized stream of revenue that is intended to make them much safer and likelier to repay investors than PREPA’s current bonds.

The planned new bonds are also intended to cost PREPA less in interest. The bonds have not yet been rated, but the securitization is supposed to make them so much stronger that they could have a coupon rate somewhere between 4 and 5 percent. The terms also call for a portion of the new bonds to pay only interest — no principal — for the first five years, to help PREPA conserve its cash. An Ad Hoc counterproposal carried a lower average interest rate of 4.11% versus PREPA’s proposal of 5.45%, depends on securitization of debt, guaranteed by 2 cents per kilowatt-hour (kWh) of PREPA’s electricity rate, which would go to a repayment fund.

The agreement assumes participation from 75% of uninsured bondholders outside the Ad Hoc Group, is forecasted to reduce PREPA’s total debt principal by approximately $670 million, save more than $700 million in principal and interest payments over the next five years and substantially reduce PREPA’s interest rate expense on the exchanged bond debt. In addition to its agreement with the Ad Hoc Group, PREPA announced an extension of its forbearance agreements through Sept. 18. All of the creditors that were parties to the existing forbearance agreements agreed to the extension other than National Public Finance Guarantee Corp.

The announcement that PREPA had an agreement with a big block of its creditors gives Puerto Rico a needed positive step in its effort to deal with its debt. The government is likely to use the PREPA agreement  something to show to other creditors the merits of negotiating consensual restructurings instead of litigating and insisting on full payment.


Press reports indicate that the GDB is taking initial steps towards a restructuring of some of its obligations as it faces continuing liquidity issues. The GDB is reported to be entering into nondisclosure agreements with some of its creditors, as the bank aims to begin debt-restructuring negotiations and raise capital. Talks would reportedly begin as soon as Sept. 8 — the same day the Puerto Rico government expects to deliver the delayed  five-year fiscal stability & economic development plan.  An exchange of GDB notes has been mentioned by government officials as one of the most sought-after measures to bring in liquidity to the government to secure its operations beyond November.  The GDB is said to have drafted a nondisclosure agreement for creditor group being represented by law firm Davis Polk & Wardwell and advised by Ducera Partners. The group includes such firms as Avenue Capital Management, Brigade Capital Management, Candlewood Investment Group and Fir Tree Partners.


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