CNE: A new PREPA RSA should lower utility’s debt by 40%
By The Star Staff
The renegotiations toward a new Puerto Rico Electric Power Authority (PREPA) restructuring support agreement (RSA) should seek to reduce PREPA’s $9 billion debt by at least 40% to be sustainable, noted Center for a New Economy (CNE) Policy Director and General Counsel Sergio Marxuach on Thursday.
The economist also warned about the possible dangers of attempting to restructure an RSA, including a proposed securitization or bond exchange, without the island Legislature’s green light.
The recently terminated PREPA Restructuring Support Agreement (RSA) was the third failed attempt to restructure at least a portion of PREPA’s debt. U.S. District Court Judge Laura Taylor Swain, in a March 8 order, expressed her concern that “the termination announcement presents the risk of a major setback in progress toward readjustment of PREPA’s liabilities.” She also imposed a tight deadline for the Financial Oversight and Management Board to commence a mediation process and file a plan of adjustment, or a term sheet thereof; submit a schedule for the litigation of pending issues; or show cause as to why the court should not dismiss the Title III case. Time, therefore, is of the essence, the judge advised. The parties have to submit a plan in May or explain to Swain why she should not dismiss the bankruptcy case.
“However, while we fully understand the desire to expeditiously conclude this process after five years of expensive and drawn-out negotiations, it is just as important to get right both the process and the substance of the debt restructuring,” Marxuach said.
In a policy brief to that end, the CNE offered some recommendations that the San Juan-based think tank hopes will provide a useful framework to thoughtfully analyze any new proposal to restructure PREPA’s debt.
The first recommendation was that any new plan of adjustment for PREPA has to be comprehensive in nature. That means the plan of adjustment must take into account the complicated environment in which PREPA operates, Puerto Rico’s weak economy, the fragility of the island’s transmission and distribution system, PREPA’s aging generation fleet, the politicization of its management, and PREPA’s prior history of mismanaged initiatives to reduce costs. Marxuach noted that the war on Ukraine has resulted in an Increase In oil prices.
A restructured PREPA should be a solvent entity, he said. “This is more than a mere accounting technicality. If PREPA is still insolvent, even after exiting the negotiation process, then it is questionable whether the plan of adjustment would be confirmable by the Court,” Marxuach said. “While PROMESA [the Puerto Rico Oversight, Management and Economic Stability Act] does not require that solvency be established to confirm a plan of adjustment, it does require that it be viable and certainly solvency is at least one component of any viability analysis.”
The debt reduction at PREPA has to be drastic, Marxuach noted. According to PREPA’s monthly report to its governing board for December 2021, PREPA’s liabilities totaled $18.1 billion, while its assets added up to $10.1 billion, a difference of $8 billion. In theory, then, that is the minimum amount — $8 billion or 44% of all liabilities — by which all of PREPA’s obligations would have to be reduced in order to keep it as a minimally sustainable going concern post-restructuring. It would be extremely ironic, not to say utterly irrational, the economist said, to finish the expensive five-year process with an entity that is still technically insolvent.
The restructuring debt should eliminate the securitization structure, Marxuach asserted. Securitization would have guaranteed the repayment of the new PREPA bonds regardless of PREPA’s operational situation and would have represented a significant upgrade of the bondholder’s collateral package.
“The repayment guarantee for any new PREPA bonds, as is the case with the existing PREPA bonds, should be a lien against the net revenues after payment of the operating costs of the issuer generated by PREPA,” he said. “We see no reason for upgrading this security structure or for substantially modifying PREPA’s current relative repayment priorities, unless creditors provide an infusion of new money, something analogous to a debtor in possession financing, or some other similar consideration.”
Marxuach also noted that doing a securitization without legislative approval could result in lower credit ratings for the new bonds and go against PROMESA, which establishes as a requirement a return to the markets with an investment grade rating.
In response to questions from reporters, Marxuach said he has not seen any studies as to the impact on PREPA finances of a proposed construction of stations that can recharge electric vehicles.