Early last month, just as Puerto Rico Governor Alejandro García Padilla traveled to Capitol Hill in an ill-fated effort to convince lawmakers that the island’s various bankrupt public entities should be allowed to utilize US bankruptcy laws, PREPA (the commonwealth’s heavily indebted power utility) was busy cementing the largest restructuring in muni market history.
The deal was actually sealed months earlier, but the monolines were holding things up. Ultimately, all sides finally agreed that it was in everyone’s best interest to strike a deal and once MBIA and Assured Guaranty were on board, the stage was set for an $8.2 billion restructuring.
As part of the deal, creditors agreed to take a 15% haircut and the insurers would put up a $450 million surety bond. The agreement would have knocked $700 million off the utility’s debt service burden. It also would have reduced PREPA’s principal owed by $600 million.
We say “would have” because that deal is apparently off the table.
“Chances of Puerto Rico’s power utility PREPA reaching a deal with creditors to restructure its $8 billion debt were cast in uncertainty on Friday as one deadline passed and the utility baulked at the new terms offered for a new one,” Reuters reported on Saturday. “PREPA said in December that it had reached a deal with 70 percent of all creditors [but] for that to work, Puerto Rico needs to pass legislation enabling PREPA to create a new charge on customer invoices specifically to pay the debt, so that the new bonds could earn the higher ratings that creditors expect.”
Lawmakers needed to vote by Friday on the new tax and when that deadline came and went, creditors found themselves right back where they were last year: owed nearly $9 billion with no plan on how to get repaid.
“The group of bondholders negotiating with the Puerto Rico Electric Power Authority, known as Prepa, had accepted a 15 per cent haircut on the debt in exchange for new securitised notes after more than a year of discussion,” FT notes. “Prepa said on Saturday that it had offered to extend the restructuring deal by an additional three weeks with the ad hoc group of bondholders to give the legislative assembly additional time to review the act.”
Now, everyone is apparently confused as to what’s actually going on.
“We are disappointed that the ad hoc group did not grant our requested extension,” Lisa Donahue, Prepa’s chief restructuring officer said. “Prepa remains willing to continue discussions with the ad hoc group and other stakeholders.”
Bondholders, on the other hand, say they find the stalemate “extremely disappointing and perplexing.”
“The creditors blamed the utility for scuttling the talks, saying Prepa officials had decided to let a critical expiration date pass without taking action,” The New York Times writes. “But Prepa said it was the creditors’ fault for trying to impose a requirement that Prepa had already rejected.”
“As part of their proposed extension, bondholders were also offering to provide $115 million of additional capital,” Reuters goes on to note. “PREPA said the bondholders changed the terms of that offer, conditioning it on regulatory approval by Puerto Rico’s energy commission for the imposition of the additional charges to customers.”
While all of this sounds like a petty dispute between recalcitrant Puerto Rican lawmakers and belligerent creditors, it actually has serious implications for the island’s prospects as it relates to restructuring a debt burden that amounts to some $70 billion.
The market had held up the PREPA deal as a kind of blueprint for how the island’s other debt might be restructured. Now, it seems more likely that the effort will be presented as evidence of how difficult it will ultimately be for the commonwealth to strike deals with creditors.
PREPA needs to make a $400 million payment on July 1. Without a restructuring agreement, it’s likely the utility will default, and event the utility’s chief restructuring officer says would be “a disaster.” PREPA “also owes about $700 million to two institutions that finance the shipments of fuel that Prepa burns to produce energy,” The New York Times continues, “if the utility failed to make those payments fuel shipments could then stop, and blackouts across the island would result.”
Yes, “blackouts across the island,” at which point the debt crisis will finally hit home for everyday Puerto Ricans who will promptly take to the streets to ask why the lights are out.
The real question here is this: did Puerto Rico deliberately undercut the PREPA restructuring deal in order to prove to US lawmakers that bankruptcy is the island’s only option?
Remember, Padilla has long said the PREPA deal shouldn’t be seen as an excuse for denying the island access to bankruptcy proceedings.
We’ll leave it to readers to decide and simply close with a quote from the president of Puerto Rico’s Senate, Eduardo Bhatia.
“PREPA had no incentives whatsoever to be efficient. This is incredible. Our power plants look like the cars in Cuba.”
via Zero Hedge http://ift.tt/1RHnhTY Tyler Durden