Puerto Rico Plays Chicken With Its Creditors
On Sept. 1 the state-owned Puerto Rico Electric Power Authority (Prepa) faces a deadline for restructuring more than $8 billion in debt. If it can’t come to an agreement with creditors, a previous forbearance agreement will expire and the company will face default.
In that event, bondholders could be expected to go to court to begin the process of receivership, as the bond contracts stipulate.
This high-stakes negotiation comes when Puerto Rico is asking Congress to give its municipalities and public agencies access to the chapter 9 bankruptcy protection the 50 states have. A Prepa default would be disruptive and possibly increase the odds that Congress will agree.
But failure on the part of the utility to negotiate in good faith also could backfire and jeopardize support in Washington for giving Puerto Rico chapter 9 protection. It could also reduce sympathy on the mainland for the write-down of other Puerto Rico debt issues—which total some $63 billion—that Gov. Alejandro García Padilla says he needs to get the island growing again.
Puerto Rico’s decision not to make most of a $58 million interest payment that was due Aug. 3 has raised suspicion among both islanders and mainlanders that Mr. García Padilla is trying to bring creditors to heel. Jaime Benson, an economics professor at the University of Puerto Rico, told me in a telephone interview last week that the governor, and the legislature which his party controls, made a conscious decision, when they approved the budget, not to put the funds aside for that payment.
“They are explicitly legislating default because they think that puts the creditors on their knees. Then the creditors have to make concessions,” says Mr. Benson, who like many Puerto Ricans believes that the island deserves to be covered by chapter 9 but rejects that strategy. “Creditors have protections [in bond contracts],” he adds, “and a court of the law is going to enforce those agreements.”
A comparison of Prepa’s most recent publicly available refinancing proposal to creditors on June 25 and a counterproposal from creditors on July 7 suggests that Puerto Rico is also playing chicken with Prepa bondholders.
“The forbearing bondholders,” as the group calls themselves, say that their offer is as good, or even sweeter than what Prepa proposed. It cuts the average interest rate over the life of the bonds to 4.11%, well below the 5.45% that Prepa proposed and also below the existing average interest rate of 5.24%. Total scheduled debt service through 2025 is now $7 billion but the forbearing bondholders propose to cut it to $4.8 billion. Prepa has not made public how much total debt-service relief it wants.
The creditors say that their proposal would leave debt outstanding at $400 million less than Prepa’s proposal and that it provides greater liquidity relief for the utility than Prepa requested.
Prepa declined to comment on whether these details accurately reflect its proposal. But on Aug. 11 Lisa Donahue, chief restructuring officer for Prepa, released a statement that “PREPA is not prepared to agree to a restructuring that fails to provide a viable path, that merely kicks the can down the road or that imposes its burden unfairly on ratepayers.”
Prepa negotiators declined to comment last week when I asked at what rate the utility wants to be able to deliver electricity. The forbearing bondholders say that their restructuring would cut rates but also point out they can only influence debt service, no other costs. If fuel and operations—bill collection, for example—are not well managed, it’s unreasonable to expect them to bear all the burden of rate reductions, they say.
I suspect that Prepa is also resisting the change of revenue bonds to securitized bonds as contained in the counterproposal. Securitized bonds provide bondholders with a property right to a designated cash-flow stream. This would effectively eliminate a default option for Prepa in the future, an escape hatch Prepa may be reluctant to surrender. Prepa would not comment.
Mr. GarcÍa Padilla’s office declined to comment on the government’s own fiscal crisis or the Prepa negotiations. But Senate president Eduardo Bhatia, a member of the governor’s party, told the Puerto Rican daily El Nuevo Día on Aug. 12 that he doesn’t know why Prepa has not come to an agreement with the creditors. “I understand that the bondholders have made offers that appear to be attractive and that could be useful for Puerto Rico,” he said.
In a June op-ed in the Hill, Jennifer González, minority leader of the Puerto Rico House of Representatives, argued that the island should pay its debts and that a settlement with Prepa bondholders should be part of a broader Puerto Rican initiative to “put in place real operational fixes.”
For those who think Puerto Rico can maintain business as usual, stiff-arming creditors is an obvious choice. Puerto Ricans deserve better.
Write to O’Grady@wsj.com.
Puerto Rico Plays Chicken With Its Creditors
In that event, bondholders could be expected to go to court to begin the process of receivership, as the bond contracts stipulate.
This high-stakes negotiation comes when Puerto Rico is asking Congress to give its municipalities and public agencies access to the chapter 9 bankruptcy protection the 50 states have. A Prepa default would be disruptive and possibly increase the odds that Congress will agree.
But failure on the part of the utility to negotiate in good faith also could backfire and jeopardize support in Washington for giving Puerto Rico chapter 9 protection. It could also reduce sympathy on the mainland for the write-down of other Puerto Rico debt issues—which total some $63 billion—that Gov. Alejandro García Padilla says he needs to get the island growing again.
Puerto Rico’s decision not to make most of a $58 million interest payment that was due Aug. 3 has raised suspicion among both islanders and mainlanders that Mr. García Padilla is trying to bring creditors to heel. Jaime Benson, an economics professor at the University of Puerto Rico, told me in a telephone interview last week that the governor, and the legislature which his party controls, made a conscious decision, when they approved the budget, not to put the funds aside for that payment.
“They are explicitly legislating default because they think that puts the creditors on their knees. Then the creditors have to make concessions,” says Mr. Benson, who like many Puerto Ricans believes that the island deserves to be covered by chapter 9 but rejects that strategy. “Creditors have protections [in bond contracts],” he adds, “and a court of the law is going to enforce those agreements.”
A comparison of Prepa’s most recent publicly available refinancing proposal to creditors on June 25 and a counterproposal from creditors on July 7 suggests that Puerto Rico is also playing chicken with Prepa bondholders.
“The forbearing bondholders,” as the group calls themselves, say that their offer is as good, or even sweeter than what Prepa proposed. It cuts the average interest rate over the life of the bonds to 4.11%, well below the 5.45% that Prepa proposed and also below the existing average interest rate of 5.24%. Total scheduled debt service through 2025 is now $7 billion but the forbearing bondholders propose to cut it to $4.8 billion. Prepa has not made public how much total debt-service relief it wants.
The creditors say that their proposal would leave debt outstanding at $400 million less than Prepa’s proposal and that it provides greater liquidity relief for the utility than Prepa requested.
Prepa declined to comment on whether these details accurately reflect its proposal. But on Aug. 11 Lisa Donahue, chief restructuring officer for Prepa, released a statement that “PREPA is not prepared to agree to a restructuring that fails to provide a viable path, that merely kicks the can down the road or that imposes its burden unfairly on ratepayers.”
Prepa negotiators declined to comment last week when I asked at what rate the utility wants to be able to deliver electricity. The forbearing bondholders say that their restructuring would cut rates but also point out they can only influence debt service, no other costs. If fuel and operations—bill collection, for example—are not well managed, it’s unreasonable to expect them to bear all the burden of rate reductions, they say.
I suspect that Prepa is also resisting the change of revenue bonds to securitized bonds as contained in the counterproposal. Securitized bonds provide bondholders with a property right to a designated cash-flow stream. This would effectively eliminate a default option for Prepa in the future, an escape hatch Prepa may be reluctant to surrender. Prepa would not comment.
Mr. GarcÍa Padilla’s office declined to comment on the government’s own fiscal crisis or the Prepa negotiations. But Senate president Eduardo Bhatia, a member of the governor’s party, told the Puerto Rican daily El Nuevo Día on Aug. 12 that he doesn’t know why Prepa has not come to an agreement with the creditors. “I understand that the bondholders have made offers that appear to be attractive and that could be useful for Puerto Rico,” he said.
In a June op-ed in the Hill, Jennifer González, minority leader of the Puerto Rico House of Representatives, argued that the island should pay its debts and that a settlement with Prepa bondholders should be part of a broader Puerto Rican initiative to “put in place real operational fixes.”
For those who think Puerto Rico can maintain business as usual, stiff-arming creditors is an obvious choice. Puerto Ricans deserve better.
Write to O’Grady@wsj.com.
Failure to negotiate in good faith could cost the island the help it seeks from Washington.
By Mary Anastasia O’GradyPuerto Rico Plays Chicken With Its Creditors
Comments