AES Puerto Rico faces payment default after failing to implement cash sweep mechanism

The AES coal-fired power plant in Guayama. AES Puerto Rico is in payment default on its long-term debt and preferred shares after failing to activate a required cash sweep mechanism.

By THE STAR STAFF

AES Puerto Rico is in payment default on its long-term debt and preferred shares after failing to activate a required cash sweep mechanism -- an automatic process that would have redirected excess operational cash toward debt repayment.

The information is contained in a quarterly report submitted Tuesday to the U.S. Securities and Exchange Commission.

AES Puerto Rico has undergone a significant financial restructuring following its failure to meet debt obligations on its Series A Bond Loans. On June 1, 2023, the global energy company defaulted on principal and interest payments for its 6.625% Series A Bond Loans due in 2026, citing insufficient funds. In response, the company entered into forbearance and standstill agreements with its noteholders in July 2023.

A formal restructuring agreement was reached on March 5, 2024. Under the deal, AES Puerto Rico exchanged $156 million in defaulted bonds, including interest, for $112 million in senior secured bonds due January 2028 and $44 million in preferred shares. The preferred shares carry a 3.125% interest rate and include an option allowing AES to convert them into 99.9% of AES Puerto Rico’s ordinary shares between Dec. 30 of this year and Dec. 30, 2027, or settle them in cash.

As part of the restructuring, noteholders also extended a $23 million bridge loan due March 2026, with interest set at prime plus 4%. AES Puerto Rico is obligated to make mandatory prepayments on this loan, the senior secured bonds, and the preferred shares using excess operational cash, as defined in the loan agreements.

The transaction was classified as a troubled debt restructuring under accounting standard ASC 470-60, indicating that AES Puerto Rico was experiencing financial hardship and that creditors made concessions. No gain was recorded from the restructuring.

As of Sept. 30 of this year, the cash settlement of the preferred shares remains contingent, depending on whether AES exercises its conversion option.In addition to the restructuring, AES Puerto Rico faces a payment default of $144 million due to failure to implement the required cash sweep mechanism. Other subsidiaries, including AES Ilumina in Puerto Rico, ES Jordan Solar, and Mount Olive Solar, are in technical default for covenant violations, totaling $27 million.

Despite those defaults, AES Corp. has not triggered cross-default clauses in its recourse debt agreements, which would apply only if a defaulting subsidiary contributes 20% or more of the parent company’s cash distributions and has over $200 million in outstanding principal.

Restricted cash held by AES subsidiaries totaled $791 million as of Sept. 30 of this year, with $911 million in net assets restricted from transfer to the parent company due to lender and regulatory provisions.

AES Puerto Rico is currently working with noteholders to resolve its payment default.