Hearing on PREPA debt deal set for Tuesday
By The Star Staff
The adequacy of the disclosure statement for the Third Amended Plan of Adjustment of the Puerto Rico Electric Power Authority (PREPA), which was amended last week, will be the subject of a hearing Tuesday.
PREPA, which filed for bankruptcy in 2017 to restructure some $9 billion in debt, seeks approval of the supplemental disclosure statement, approval of ballots for stakeholders to approve the plan and the deadlines to approve the plan, under which the debt has been lowered to about $2 billion.
On Saturday, the third amended plan was amended a fourth time. As part of the amendments, the Financial Oversight and Management Board, which represents PREPA in the bankruptcy process, accepted that if bondholders disputing the plan win on appeal and their collateral is determined to be more, the plan would be unconfirmable.
The oversight board was proceeding toward a confirmation hearing set to commence in July 2023 but new information showed a significant reduction in PREPA’s revenues and required a reassessment of the proposed second amended plan, which had become unfeasible, and renewed negotiations with creditor parties. After many months of negotiations, the board developed the Third Amended Plan, which addresses the deficiencies caused by the 2023 PREPA Fiscal Plan.
The oversight board also said an amendment to an agreement made with Blackrock increases bondholder support to about 37.5%. The agreement also has the support of bond insurer National Public Finance Guarantee and the fuel line lenders, among other groups.
The Third Amended Plan lowers the amount of debt PREPA will repay to the debt level determined in the debt sustainability analysis in the 2023 PREPA Fiscal Plan. That is the amount of debt PREPA should be able to service. PREPA’s main source of revenues to pay its operating expenses and debt comes from the rates it charges to its customers for electricity consumption. “PREPA’s rates must cover the increased costs of operation, but PREPA cannot raise rates to a level that is unaffordable to its customers,” the oversight board said. “PREPA is limited in its capacity to raise rates for several reasons. The increasing availability of alternatives to power provided by PREPA, such as solar, will compete with PREPA. The higher PREPA’s rates are raised, the more customers will leave and use alternatives.”
The Third Amended Plan also considers certain legal rulings issued in 2023. The bondholders and PREPA disagreed as to the extent of the bondholders’ collateral and the amount of their allowed unsecured claim. The Title III court ruled their collateral was limited to monies in certain funds, and did not include PREPA’s ongoing revenues. Additionally, while the bondholders asserted an allowable recourse claim of some $8.4 billion for principal and interest accrued before the PREPA Title III case began, the Title III court ruled the allowable recourse claim was $2.3 billion. It is possible that those determinations will be appealed.
“PREPA has endeavored, however, to construct the Third Amended Plan so that whether the Bondholders’ claims are allowed at $2.3 billion or more, the plan will be confirmable without further amendments,” the oversight board said.
Under the plan, distributions to creditors will be structured predominantly in the form of cash through the sale of the new bonds, and two contingent value instruments, CVI[1]1 and CVI-2. The new bonds will be issued in the amount of some $2.2 billion and will be payable solely from and secured by revenues attributable to a “Legacy Charge” to customers. The new bonds will be issued in two series: Series A Bonds and Series B bonds. The Fuel Line Lenders will receive consideration in the form of Series A Bonds for $650 million. The Series A Bonds will have a final maturity of 15 years and an expected repayment of nine years. Other creditors, including the bondholders and parties with general unsecured claims (GUCs), will receive “Plan Consideration” in the form of the cash proceeds from the purchase of Series B Bonds by certain purchasers under the forward Delivery Bond Purchase Agreement, additional cash in the amount of $53.4 million, and any Series B Bonds that are not purchased by any pPurchaser on or before the effective date. The Series B Bonds shall be issued in two maturities with an aggregate principal amount equal to $1.6 billion, which have different maturity dates.
The plan also proposes to issue two different CVIs to creditors. The CVI-1 is designed to provide creditors with additional recovery if PREPA’s actual revenues exceed those projected in the 2023 PREPA Fiscal Plan. The CVI-2, meanwhile, is designed to share a portion of the savings that Genera PR, the private operator of PREPA’S power generation fleet, achieves under the Genera operation and management agreement by reducing certain of PREPA’s projected expenses.