As the Puerto Rico Electric Power Authority seeks to extend $617 million of bank loans due in the next two months, it’s poised to become the largest municipal restructuring in the $3.7 trillion state and local market.
It’s also the riskiest for Puerto Rico investors. Bondholders of Prepa debt have the greatest threat of not being paid in full compared with other commonwealth agencies. Of its $8.6 billion, about 70 percent, or $5.8 billion, doesn’t have additional protection through bond insurance, according to data compiled by Bloomberg.
While a new law aims to restructure some Puerto Rico public-corporation debt outside of a bankruptcy filing, Prepa’s $8.6 billion alone exceeds the $8 billion of general obligations and water and sewer debt in Detroit’s historic bankruptcy filing and Jefferson County, Alabama’s $4.2 billion failure.
“This is the biggest possible restructuring in the history of the market, by amount,” said Matt Fabian, managing director at Concord, Massachusetts-based research firm Municipal Market Advisors. “The more relief, the better their economic prospects, so it makes sense for Puerto Rico to look for severe bondholder haircuts.”
Puerto Rico’s economy has struggled to grow for eight years and its 13.8 percent jobless rate is more than double the U.S. average. The commonwealth and its agencies owe $73 billion, with about 66 percent of U.S. muni mutual funds holding the securities, according to Morningstar Inc. The debt is so widely held because it’s tax-exempt nationwide.
Governor Alejandro Garcia Padilla is poised to sign a bill that would let certain public corporations reduce their debt. Padilla, who took office in January 2013, has been pushing agencies to stop relying on the commonwealth’s operating budget, which has shown deficits for years.
Along with Prepa, the law enables the Puerto Rico Highways & Transportation Authority to restructure its $5.5 billion of debt, and for the Puerto Rico Aqueduct and Sewer Authority to alter its $3.7 billion, according to Bloomberg data. About 90 percent of the Prasa debt and 40 percent of highway authority bonds aren’t insured, Bloomberg data show.
Puerto Rico’s restructuring law excludes the commonwealth’s $10 billion of general obligations and $15 billion of debt backed by sales-tax revenue.
If the agencies were to pay less than the bonds’ original prices, insurers such as Assured Guaranty Ltd. and MBIA Inc.’s National Public Finance Guarantee Corp. would be forced to make up that difference with investors holding insured securities. Other bondholders don’t have that extra security.
With its liquidity problems and electricity costs that are double that on the U.S. mainland, Prepa may offer repayment below 10 cents on the dollar, Fabian said. At least 75 percent of investors would need to approve any restructuring, which would be difficult, he said.
“A crisis is very near for the utility,” Fabian said. “Haircuts are likely to be very deep and in that context, that will make consensus even harder to get.”
Uninsured Prepa bonds maturing July 2028 traded today at 12:40 p.m. at an average price of 51 cents on the dollar, down from 60 cents on June 24, the day before Garcia Padilla filed his restructuring bill, according to data compiled by Bloomberg.
“We are not going to comment on or speculate about future actions that may be taken,” Barbara Morgan, a New York-based spokeswoman for the Government Development Bank, which works on the commonwealth’s debt sales, wrote in an e-mail.
Fitch Ratings yesterday slashed Prepa’s rating to CC, its third-lowest speculative grade, after Puerto Rico’s legislature passed the law. Prepa has a combined $671 million of bank lines of credit that mature in July and August, Dennis Pidherny, a Fitch Ratings analyst, wrote in a report released yesterday.
Moody’s Investors Service and Standard & Poor’s also assign Prepa junk ratings.
Assured Guaranty had $5.34 billion of exposure to Puerto Rico debt, including $2.72 billion affected by the new law, according to the company’s March 31 financial filing. National Public Finance’s commonwealth exposure is $4.8 billion, including $2.5 billion that could be restructured, as of March 31, according to the firm’s website.
“National will ensure that its policyholders receive all of their principal and interest payments on time and in full,” Kevin Brown, a National spokesman, wrote in an e-mail.
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