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Puerto Rico Governor Ricardo Rossello submitted a revised fiscal plan for the bankrupt island which sees zero debt service payments over the next five years, and lays out the initial process for the privatization of the island's beleaguered power utility.
The previous fiscal plan, which was certified by the federally appointed oversight board in March 2017, covered a 10-year period and allocated around $787 million per year for debt service payments. That amounted to less than a quarter of the $3.5 billion owed to creditors every year.
After the destruction of Hurricane Maria, it was decided that the fiscal plan needed to be revised to reflect the new reality the already cash-strapped island was facing. The revised fiscal plan for Puerto Rico's central government covers a reduced time frame of five years and allocates nothing to creditors, while guaranteeing retirement pensions.
An addition to the revised fiscal plan is an expense for Title III proceedings, which is the bankruptcy-like that a federal judge is currently overseeing for the island's outstanding bond indebtedness of roughly $73 billion, or nearly $17,000 debt per capita.
Moody's Investors Services notes that specific bondholder recoveries "will likely emerge after judicial proceedings or negotiations, and would be determined by economic projections and relative strengths of bondholder claims," said Ted Hampton, VP and Senior Credit Officer at Moody's.
The Commonwealth expects expenses for its government to increase over the five-year period, while projecting a cumulative decline in population of 19.4 percent over the same time period.
The plan also includes an injection of $35.3 billion in federal aid from FEMA, although it anticipates receiving "significantly more" and has previously requested $94.4 billion in Federal Disaster Relief Assistance.
Approximately 51 percent of that federal aid is intended to be allocated to repair, modernize and strengthen the island's crumbling water and power infrastructure.
However, even after all government transformation initiatives and structural reforms are implemented, Puerto Rico still foresees have a funding gap of $3.4 billion through fiscal 2022. As a result, the island's government believes a liquidity facility will be needed to bridge the gap.
Puerto Rico's Electric Power Authority (or "PREPA") is one of the largest public power utilities in the US, serving 1.5 million customers with total revenues of $3.4 billion, total assets of $9.4 billion and total liabilities of $11.4 billion in fiscal 2017.
A key challenge highlighted in the fiscal plan is that a significant amount of emergency federal funding is needed to alleviate PREPA's immediate liquidity shortfalls. The plan sees three buckets of funding as options: Community Disaster Loans (or "CDL") from the U.S. Treasury, FEMA Emergency Funding Commonwealth Bridge loans to cover essential current and near-term government functions in advance of receiving a CDL.
The governor's intended transformational plan for PREPA, which he announced on Monday, was included in the fiscal plan.
PREPA's transformation assumes that the utility will cease to operate in its current from in the next 18-months with the island aiming to sell the existing PREPA generation assets to private investors. It also includes development of new generation and a concession model for the power transmission and distribution (or "T&D") system (for example, the system would still be owned by the Government of Puerto Rico, but would have a private operator).
The terms of concession are listed as "to be determined, but likely medium to long-term," with the concessionaire having the right to collect all revenues, and the responsibility to pay all costs, generated by the T&D system.
Rep. Rob Bishop, R-UT, the chairman of the House Natural Resources Committee and key figure in crafting PROMESA, called for full transparency in the PREPA transformation process, saying it "cannot be done behind closed doors."
"It is imperative the Oversight Board and Governor fully integrate those who hold the debt into the development of these plans, thereby guaranteeing accuracy and transparency in the underlying assumptions," Bishop said in a statement issued Thursday.
Bishop also weighed in on what he views as a legal necessity for PREPA's fiscal plan.
"The Board's stated goal under PROMESA is to return Puerto Rico to fiscal accountability and the capital markets, and this can only occur if the fiscal plans respect the lawful priorities and liens of debt holders," he said.
A sentiment echoed by Assured Guaranty, which has approximately $853 million of net par exposure to PREPA's debt as of Sept. 30, 2017.
The insurer issued a strongly worded statement on Tuesday night that urged any potential privatization partners or investors to look at if the Commonwealth's plan adheres to the laws set by PROMESA and the U.S. Constitution.
"The system cannot be sold free and clear of the lien on revenues unless the lien is discharged through full payment of the bonds, there is adequate coverage of debt service after any sale of assets, or the bonds are given the full value of their collateral through a confirmed plan of adjustment," the insurer said in the statement.
PREPA's bonds are secured by a lien on the electric utility system revenues, and are further supported by covenants and Puerto Rico law that ensure the electricity rates are sufficient to cover all costs including debt service.
The plan to privatize also sparked concerns with a separate group of PREPA creditors which hold around $3.3 billion of PREPA's bonds.
"We believe the only path for any proposal to deliver low cost and reliable power will be if it respects property rights, since failure to do so will result in years of litigation from multiple parties," a written statement issued on Monday by the Ad Hoc Group of Bondholders said. The group includes hedge funds BlueMountain Capital and Marathon Asset Management, as well as mutual funds OppenheimerFunds and Franklin Advisers.
The federally appointed Oversight Board confirmed receipt of the Fiscal Plans for the Commonwealth, PREPA and also for PRASA, the aqueduct and sewer authority.
"The Oversight Board views implementing structural reforms and investing in critical infrastructure as key to restoring economic growth and increasing confidence of residents and businesses," said Natalie Jaresko, Executive Director of the Oversight Board in a statement issued Thursday.
The Oversight Board is holding a listening session to receive testimony from experts and stakeholders on the future of Puerto Rico's energy sector next Thursday in New York. The Board also intends to proceed with its evaluation of the three fiscal plans and hopes to certify them by February 23rd.