Puerto Rico’s Electric Power Authority said it has reached an agreement with some bondholders and hedge funds to restructure $8.3 billion of the agency’s debt, with investors taking about a 15 percent loss in a debt exchange.
The agreement with owners of about 35 percent of the outstanding bonds will reduce the utility’s debt by about $670 million and save more than $700 million in principal and interest over the next five years, according to a statement Wednesday from the electricity provider, known as Prepa.
Investors including OppenheimerFunds Inc., Franklin Advisers Inc., BlueMountain Capital Management and Goldman Sachs Group Inc. have been in restructuring talks for a year with the utility, which hasn’t been able to cover expenses to produce electricity for most of the island’s population. The negations are separate from a plan authorized by Puerto Rico Governor Alejandro Garcia Padilla in June that seeks to reorganize the commonwealth’s $72 billion debt burden.
“Its a better recovery for bondholders than what bondholders were expecting to get,” Daniel Hanson, an analyst at Height Securities, a Washington-based broker dealer, said of the Prepa agreement.
Prepa bonds maturing July 2026 changed hands Wednesday at an average price of 67.2 cents on the dollar, up from 54.5 cents on Monday, data compiled by Bloomberg show. The average yield was 10 percent.
Some Prepa bonds have been trading below 85 cents for two years, according to data compiled by Bloomberg, suggesting potentially big gains for investors who stand to recover 85 percent of the face value of the securities.
Under the agreement, bondholders who are part of a forbearance pact, which keeps negotiations out of court, will exchange existing bonds for new securitized debt repaid with a utility-customer surcharge. That structure requires legislative approval, according to a term sheet posted Wednesday on the Municipal Securities Rulemaking Board’s website, known as EMMA.
Bondholders outside of that group may receive bonds paying interest at a rate of 4 percent to 4.75 percent, or receive convertible capital appreciation bonds that will accrue interest at 4.5 percent to 5.5 percent in the first five years and pay current interest in cash thereafter.
“We are pleased that the ad hoc group realized the benefit of our shared burden solution,” Lisa Donahue, Prepa’s chief restructuring officer, said in a statement. “We will continue to focus on finalizing consensual agreements with the other creditors so that we can continue to implement Prepa’s transformation.”
A restructuring of the utility would be the largest-ever in the $3.6 trillion municipal-bond market. The tentative Prepa agreement, reached just before a midnight Tuesday deadline, comes days after Garcia Padilla gave advisers more time to work on what the administration calls an economic recovery and debt adjustment plan that is expected to seek a reduction in the commonwealth’s payments.
The proposed changes may not be enough to address Prepa’s capital-spending needs over a longer period of time, Hanson said. At some point, the utility will have to borrow again for infrastructure improvements and it’s uncertain if the utility will be able to take on more debt, he said.
“It’s fine in the initial years, but it’s unclear that they understand how to make the cost structure sustainable in the long term,” Hanson said.
For some investors, such as Franklin Advisers, who have held the debt for more than two years, the agreement allows Prepa to begin improving its finances, Rebecca Radosevich, a spokeswoman at Franklin, said in an e-mailed statement. OppenheimerFunds called the agreement a win for bondholders in a Twitter posting.
“We are satisfied that this agreement positions Prepa to provide reliable and lower-cost service, fund its capital needs for the medium-term, ensure environmental compliance, diversify generation resources to include more natural gas and provide jobs,” Radosevich said in a statement.
Prepa bondholders agreed to extend the forbearance agreement to Sept. 18. All forbearing creditors except for municipal bond insurer MBIA Inc. decided not to renew that contract with Prepa, according to the statement. Follow insurer Assured Guaranty joined in on the extension.
Greg Diamond, a spokesman for MBIA, declined to comment in an e-mail Tuesday.
Prepa and its creditors signed the forbearance agreement in August 2014 after the utility raided its capital budget to pay for fuel. Prepa relies on oil to produce most of its electricity and rates are double those on the U.S. mainland. Since entering the pact, the agency and bondholders have exchanged proposals on how to restructure the debt and modernize the system to incorporate more natural gas. This is the seventh extension.
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