Late on Tuesday, the Puerto Rico Electric Power Authority and a large group of its creditors reached a verbal agreement on the framework for a restructuring plan of the utility's $8.6 billion in outstanding debt, narrowly making the Forbearance Agreement deadline that required a term sheet be in place by midnight.
The agreement, which has been in place for more than a year and protected the utility from litigation, was extended through Sept. 18.
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Details of the plan continue to be hammered out between Prepa, one of the largest utilities in the U.S., and the Ad Hoc Group of creditors—comprised of traditional mutual funds and hedge funds including BlueMountain Capital and Knighthead Capital—which holds about 35 percent of the debt outstanding.
Noticeably absent from the new forbearance agreement is MBIA, the largest insurer of Prepa's paper with about $1.4 billion in gross exposure (out of the 30 percent, or $2.6 billion, of Prepa bonds that are insured). Some uncertainty remains around why MBIA chose not to accept the deal; the power authority plans to continue negotiating with MBIA, as well as its other insurers and lenders.
With no money currently being set aside by the utility for future bond payments, a finalized restructuring deal seemingly will have to be signed before Jan. 1, when a $191 million coupon comes due to its bondholders. Investors are focused on this deadline as more than 50 percent of Prepa's bonds are held by U.S.-based mutual funds, including Franklin Templeton and Oppenheimer Funds.
Under the restructuring plan, the Ad Hoc Group will swap the existing revenue bonds for new notes and receive 85 percent of its existing bond claim.
Bondholders will have two options to swap their existing bonds: Option A is a securitization bond that pays cash interest only for the first five years at a rate of 4 percent to 4.75 percent; option B,is a securitization bond that will accrete interest, but not pay cash, at a rate of 4.5 percent to 5.5 percent during the first five years and pay current interest in cash thereafter.
The plan, assuming participation of 75 percent of the uninsured bondholders excluding those in the Ad Hoc Group, is forecast to reduce Prepa's total debt principal to approximately $670 million and save more than $700 million in principal and interest payments over the next five years.
Melba Acosta-Febo, president of the Government Development Bank for Puerto Rico, hopes the deal will set a precedent for the some $60 billion in remaining debt that will likely need to be restructured.
"The economic terms agreed by PREPA and the Ad Hoc Group represent an important step forward in PREPA's restructuring process, and is an example of the promising results that can be achieved when the commonwealth and its creditors work together," Acosta-Feba said in a statement Wednesday following the utility's announcement.