By The Star Staff
U.S. District Judge Laura Taylor Swain has granted the Financial Oversight and Management Board a two-week extension to present the new debt adjustment plan for the Puerto Rico Electric Power Authority (PREPA).
Swain’s ruling late last week came after the oversight board filed an emergency motion asking for more time as they were in negotiations with bondholders. The debt adjustment plan was due Friday.
“While the Oversight Board cannot guarantee a new settlement will be attained with creditors holding a substantial percentage of the outstanding debt, it believes the prospects of such a settlement are sufficient to try to avoid filing an amended, proposed plan this week that might have to be amended again shortly thereafter, especially because the filing will trigger other filings of positions and schedules that might also change if a new settlement is attained,” the board said.
Swain, who is overseeing Puerto Rico’s Title III bankruptcy cases, extended to July 28 the deadline to submit to the court the amended third debt adjustment plan. She gave the parties until Aug. 2 to file a joint status report with a proposed litigation schedule for confirmation proceedings and a proposed order implementing that proposed schedule and addressing any additional notice requirements or other procedural issues.
The current debt adjustment plan proposes to cut PREPA’s bonded debt to $2.5 billion from the estimated $8 billion. Bondholders would receive an interest rate of 6% and the possibility of additional income through a new contingent value instrument (CVI) if PREPA meets its electricity sales targets.
The oversight board will include a “fixed legacy charge” in the electricity rate to pay bondholders, instead of the previously proposed “hybrid” charge. Additional protections for bondholders, such as a new trust deed and a specific lien against the “legacy charge,” will also be included in the new plan. The new trust deed will require PREPA to adjust its rates and charges to ensure revenues cover operational costs.
As reported by the STAR in June, a debt sustainability analysis found that the maximum amount PREPA can reasonably pay to creditors is about $2.5 billion, including some $2.38 billion in new bonds serviceable by rates at or about the 6% share of wallet threshold for the first expected year of implementation, or fiscal year (FY) 2025. The 6% share of the wallet is the number provided by experts as the maximum amount PREPA customers can pay from their yearly household income in electricity.
It also includes an additional $150 million of value the oversight board believes can be provided at a tolerable risk level through additional potential revenue sources and savings.
Based on the debt sustainability analysis, the Title III Debt Plan will reduce the number of new bonds to be issued to $2.38 billion from the $5.68 billion proposed initially as repayment. The total bonded debt is about $8.4 billion. Bondholders are expected to reject the new offer.
About $1.35 billion of new bonds or cash will be used to maintain the settlements with the fuel line lenders, monoline National, the settling bondholders, and Vitol.
The treatment of the pension claims will not be amended. PREPA’s pensions will be paid under a pay-as-you-go mechanism.
Non-settling bondholder claims and general unsecured claims will be guaranteed a minimum distribution of 12.5% of their allowed claim in the form of new bonds. In addition, they will receive the CVI currently in the second amended plan and another CVI adjusted to the amount of their final allowed claim. The proposed second CVI will be distributed to the non-settling bondholders to compensate if PREPA’s revenue requirements equivalent per kilowatt-hour (kWh) for a specific year are lower than the revenue requirements per kWh projected in the 2023 fiscal plan.
Mediations between the bondholders and the oversight board fell apart in December 2022 after the board filed a plan that bondholders felt short-sheeted them and unfairly favored other creditors. The talks were revived briefly in May under orders from Swain, but mediators spent only a few hours in June on negotiations. Recently, bondholders had a major setback when Swain found bondholders have only $2.4 billion in unsecured claims against the utility and not $8.3 billion in outstanding debt.