Puerto Rico bond deadlines loom: What you need to know

Impact of Puerto Rico's debt
Impact of Puerto Rico's debt

Shortly after June 29, when the governor of Puerto Rico declared that the island's $72 billion in debt was not payable, the Working Group was established to start on a comprehensive fiscal adjustment plan to restructure the U.S. territory's debt.

The Working Group's restructuring plan was due to be delivered to Gov. Alejandro Garcia Padilla for review on Sunday. However, according to a statement issued by the Governor's Chief of Staff, Víctor Suárez Meléndez, the Governor granted a last minute extension to the Working Group to present their fiscal adjustment proposal.

"Since the Government's efforts in the past days have been focused on preparing for the possible impact of tropical storm Erika, the work of the designated group, the consultant's analysis, and the final drafting of the document have not been completed."

The new deadline for the group to deliver the plan to the Governor for review will be "on or before September 8, 2015."

Once the proposal has been completed, the intended date the details will be made public is not known; Padilla is to make that decision after he reviews the plan.

A 'soft' plan

Some details of the plan were revealed in leaked documents obtained, and posted, by the local newspaper, NotiCel, and, at first glance it doesn't appear to be as hard hitting as some had hoped for.

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"The plan presented yesterday is soft, in that it relies on phantom savings and difficult managerial reforms," Dan Hanson, an analyst at Height Securities, which advises clients with financial interests in Puerto Rico, wrote in a report last week

Hanson also notes that "the plan as presented still implies that (Puerto Rico) needs $2.5 billion in debt relief per year in medium term, which implies that the commonwealth is still intending to deeply haircut bondholders of many (or most) Puerto Rican bonds."

Monday: PRASA payment due

A Puerto Rican flag flies from a building in San Juan, Puerto Rico.
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The sole provider of public and wastewater services in Puerto Rico, PRASA, has a scheduled $90 million payment due to its trustee, Banco Popular, on Monday.

The $90 million loan stems from an agreement PRASA was able to broker with its creditors in late May to avoid a $150 million payment deadline due to Banco Popular and Oriental Bank. The deal was brokered under the assumption the utility would be able to execute a new bond offering prior to the Aug. 31 due date.

In mid-August, PRASA filed to sell $750 million in revenue bonds to investors. However, a pricing date has yet to be set for the bond deal—which would have been the first issuance by the U.S. territory since March 2014—and is likely on hold until after the Working Group's plan to restructure Puerto Rico's debt is unveiled.

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Despite the failed bond sale and insufficient funds in its coffers, PRASA should still be able to make the payment, albeit through a separate source.

In a note issued earlier this week, Sandler O'Neill's Alexander Twerdahl pointed out that in the event that the long-term debt offering intended to repay the $90 million loan is not successful, "the loan shall be paid from moneys withdrawn from PRASA's Rate Stabilization Account, which are currently held in escrow."

Tuesday: PREPA restructuring

On Tuesday at 11:59 p.m. ET, the current forbearance agreement in place between the Puerto Rico Electric Power Authority, one of the largest utilities in the United States, and a group of its creditors will terminate if both parties fail to agree on the terms of a restructuring plan.

The agreement, which has been in place for more than a year through multiple deadline extensions, allows the commonwealth's power utility to keep operating while continuing to negotiate restructuring its approximate $8.6 billion in outstanding debt. It also protects PREPA from lawsuits.

The most recent extension of the agreement occurred on July 1, when PREPA narrowly avoided default by scrambling to secure $128 million in bridge loans so that it could make a scheduled $415 million payment to its bond holders on time. As part of the short-term deal, creditors agreed to extend the forbearance agreement through Sept. 15 with the stipulation of having a Restructuring Support Agreement in place by Tuesday.

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If terms for restructuring the beleaguered power utility's debt are not in place on time, or if negotiations between the two parties break down, the forbearance agreement will be terminated and creditors will have the right to take PREPA to court. Experts expect the lawsuit would be filed in the U.S. District Court for the District of Puerto Rico in San Juan.

The forbearing creditors, also referred to as the Ad Hoc Group, are a handful of hedge funds—including BlueMountain, Marathon and Knighthead—major bond funds Franklin Templeton and Oppenheimer, as well as other institutional investors.

According to an amended version of the original forbearance agreement, other parties to the agreement include the bond insurers, MBIA, Assured Guaranty and Syncora. The group collectively holds or insures more than 60 percent of the total outstanding principal amount of PREPA's bonds.