New PREPA deal offers non-settling bondholders 3.5%

The Puerto Rico Oversight Board reached an agreement Friday with several bondholders of Puerto Rico Electric Power Authority debt in a proposed plan of adjustment that offers significantly more of the original value of outstanding bonds to them than to those who did not agree to the plan.

BlackRock Financial Management, Nuveen Asset Management, Franklin Advisers, Whitebox Advisors, and Taconic Capital Advisors agreed to the plan, which would give them 12.5% of original par. In exchange, these firms agreed to support the terms and to not file an appeal of the plan of adjustment if the District Court approves it.

The firms and people who do not agree to the settlement, including Assured Guaranty, Syncora Guaranty, and GoldenTree Asset Management, would receive new bonds with a par value of 3.5% of the original claim.

Robert Mujica

Puerto Rico Oversight Board Executive Director Robert Mujica Jr. said one can’t blame PREPA’s customers for PREPA’s mis-management.

The board submitted the plan Friday to the U.S. District Court, which is hearing the bankruptcy.

The deal also includes two contingent value instruments for possible additional payments to the bondholders that settle, but those that do not settle are ineligible for the CVIs.

Of the CVIs, one would give bondholders revenue from the fixed fee element of the PREPA legacy debt charge if the bonds are paid before the planned 35 years and electricity demands exceed the fiscal plan projections. Another CVI would give bondholders a share of the savings in the cost of fuel generated by the operator of PREPA’s power plants for the term of the operator’s agreement.

The Oversight Board also amended its previous agreement with bond insurer National Public Finance  Guarantee Corp., which would get new bonds equal to 19.3% of their original par.

There was a total of $8.3 billion of bond par outstanding when the board put PREPA into bankruptcy in summer 2017.

“Combined with other previous agreements and settlements that remain in place, approximately 43% of PREPA’s creditors support the third amended Plan,” the board said in a statement. 

Non-settling bondholders have the option to join the 12.5% deal for the time being. When asked Friday, Board Executive Director Robert Mujica Jr. and Board Chairman David Skeel were unsure when this option would elapse.

Assured Guaranty, which as of March owned $446 million and previously released a statement saying the firm remains “committed to negotiating a fair and reasonable settlement, but creditors’ rights must be respected, and this process brought to a fair and just conclusion.”

If the District Court approves this version of the plan, Assured Guaranty has indicated it would appeal it to the First Circuit Court of Appeals. Before the new electricity charges could go into effect, the Puerto Rico Energy Bureau would also have to approve them.

Blackrock, Nuveen, Taconic, Whitebox, and Franklin have committed to purchasing the new restructured PREPA bonds for $1.6 billion in cash. PREPA will use this to pay certain other creditors in cash rather than in new bonds. Nearly all the creditors except for the fuel line lenders will get this, Skeel said.

The restructured bonds would carry an average annual interest rate of 7%. A flat connection fee and a volumetric charge on customers’ bills would pay the legacy bonds.

The restructuring would reduce all claims on PREPA from more than $10 billion to $2.5 billion, excluding pension liabilities.

Pensions would be treated like they were in Puerto Rico’s central government bankruptcy. If the plan goes into effect, they would be converted to a defined contribution plan from a defined benefit plan. The inflation adjustment to their benefits would end but they would be otherwise unimpaired.

In the newly proposed plan, general unsecured creditors, such as local businesses, would receive 13.5% of their claims.

In December 2022, the board allowed uninsured bondholders to opt for a deal paying them 50% of par plus contingent vehicle instruments. Holders of only $75 million opted for this. The new plan also would stick to that agreement.

The new plan also preserves prior deals with the authority’s fuel line lenders and fuel supplier, Vitol.

In June, the board certified a new PREPA fiscal plan with new projections for electric demand and costs.

“The projections PREPA and grid operator LUMA Energy submitted to the Oversight Board for the new fiscal plan included a higher cost forecast than previously projected, including costs related to the mandated energy efficiency initiatives,” the board said in a written statement.

The median bill for residential households not currently benefiting from subsidized electricity would increase by $8.71 per month or 5%, much less than the 14% found in the previous plan, Mujica said.

According to the plan, qualifying low-income residential customers using up to 425 kilowatt hours per month would be exempt from the connection fee and the volumetric fee altogether. Nearly half of PREPA’s customers would not pay any legacy charge for PREPA.

“PREPA’s customers are not to blame for PREPA’s mismanagement,” Mujica said.

The plan would allow the authority to make needed capital investments, Mujica said.

All PREPA’s creditors and pensioners will likely have to be resolicited for the deal, Skeel said Friday. A new Disclosure Statement will be created.

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