Puerto Rico’s financial oversight board filed a plan to restructure about $9 billion of power utility debt after failing to reach a deal with bondholders, signaling the agency’s five-year bankruptcy will take even longer to resolve.
The federal board is overseeing the island’s finances and the debt proposals for Puerto Rico’s Electric Power Authority, known as Prepa, the main supplier of electricity on the island. The board wants to slash nearly 40% of Prepa’s debt — $8.5 billion in bonds and another $700 million in loans to fuel-line lenders — down to a combined $5.4 billion of new restructured securities, according to the debt adjustment plan submitted to the bankruptcy court Friday night.
Court-ordered mediation between the board, insurance companies and an ad hoc group of bondholders has so far failed to produce a consensual repayment plan. At the same time, the parties are litigating whether bondholders are entitled to Prepa’s future revenue or limited to accounts holding about $16 million.
“Puerto Rico residents and business simply cannot pay what some creditors demand at this point,” David Skeel, the board’s chairman, said in a statement Friday. “The court has asked us to propose a plan that would allow Prepa to move on and today we are fulfilling this obligation by proposing to cut Prepa’s debt to sustainable levels while leaving the door open for further negotiations.”
Prepa first started negotiating with creditors in 2014 on how to reduce its obligations. Its bankruptcy began in 2017, but has been delayed by hurricanes, earthquakes and the pandemic, while the commonwealth ended its record bankruptcy in March.
Puerto Rico needs reliable and affordable electricity to help boost its economy, which has struggled to grow after years of decline. Residents and businesses suffer from chronic blackouts and some of the highest power rates in the US.
US District Court Judge Laura Taylor Swain gave the oversight board until Friday to file a debt restructuring plan after postponing earlier deadlines in the hope that continued negotiations between the parties would generate an agreement. Swain aims to hold a confirmation hearing on the restructuring plan in July.
To cut Prepa’s debt load, the board’s plan would split bondholders into two groups: one that would settle litigation and agree that creditor repayment is limited to existing accounts, and another group that would continue litigating that bondholders have a right to Prepa’s future revenue collections.
In the oversight board’s debt proposal, bondholders that settle would get at least 50-cents on the dollar, with that amount potentially increasing if the court agrees with the board that creditors don’t have a claim to Prepa’s revenue collections. The non-settling group may get as little as 19 cents on the dollar if the court sides with the board, or more if those bondholders win.
The board is pursuing “pointless litigation” that will only hurt Puerto Rico’s residents, Stephen Spencer, managing director at Houlihan Lokey, the ad hoc bondholder group’s financial advisor, said in a statement Friday.
“The FOMB’s decision to file a highly coercive plan that lacks meaningful creditor support and has no chance of being confirmed will only serve to extend Prepa’s nearly six-year-long bankruptcy, ensure that electricity service remains unreliable and lead to higher costs for the people of Puerto Rico,” Spencer said.
Justin Peterson, a member of the oversight board, disagreed with the panel’s restructuring proposal, saying it treated bondholders unfairly.
“I believe it was predicated on financial analysis produced to solve for a desired outcome – to pay as little as possible,” Peterson said in a statement Friday.
Some Prepa bonds are trading higher than the oversight board’s 50-cent offer. Prepa bonds with a 5.25% coupon and maturing in 2040 traded Thursday at an average 74.8 cents on the dollar, data compiled by Bloomberg show.
bloomberg.com 12 16 2022