In Largest Ever Muni Restructuring, Puerto Rico Power Authority Strikes Deal With Creditors, Insurers

When last we checked in on Puerto Rico’s seemingly intractable debt debacle, Governor Alejandro Garcia Padilla was pandering to Congress in an ill-fated attempt to secure some manner of federal intervention that would help to alleviate the strain on the island’s finances. 

Meanwhile, the commonwealth avoided a messy default on $273 million in GO debt by using an absurd revenue clawback end-around to make a $354 million payment on December 1. 

On Friday, we get the latest out of Puerto Rico and the news is ... well, good we suppose. PREPA - Puerto Rico’s power authority - has reached a restructuring agreement with bondholders and insurers to refinance some $8.2 billion in debt via securitization. 

As Bloomberg reports, “ad hoc creditors will take 15c haircut on bonds and bond insurers will put up $450m surety bond.”

As WSJ noted last week, “bondholders and lenders agreed three months ago to accept losses of 15% as part of an agreement to swap old Puerto Rico Electric Power Authority debt for new bonds with more protections [but] MBIA Inc. and Assured Guaranty [were] worried about the implications for other Puerto Rico debt and haven’t signed on.”

In short, “bond insurers can’t sell their risk and don’t want to set a precedent in which a utility, which could raise rates to pay debt, restructures instead.”

As part of today's deal, "the monolines will provide an equity component that will offer about $450 million in the event of a default," Bloomberg writes adding that "the tentative agreement sets into motion what would be the largest-ever restructuring in the $3.7 trillion municipal-bond market and potentially avert a default on $196 million of interest due Jan. 1."

Friday’s deal appears to have come as a relief to investors as both insurers are rallying hard.

The deal purportedly will knock $700 million off the utility's debt service burden as well as reduce PREPA's principal owed by $600 million. 

This comes just two days after Padilla warned the commonwealth would likely default next month (or at the latest in May) as Puerto Rico faces the unpleasant prospect of sacrificing the provision of public services at the altar of the island's creditors. 

Although this does, in Bloomberg's words, mark "the first step in Puerto Rico’s goal to reduce its $70 billion debt burden and may provide a framework for agreements with other creditors," the island isn't out of the woods yet by any stretch of the imagination as the following table and list of debts make abundantly clear.

From Bloomberg

  • Puerto Rico Sales Tax Financing Corp.: $15.2 billion. The bonds, known by the Spanish acronym Cofinas, are repaid from dedicated sales-tax revenue. A $6.2 billion portion of the debt, called senior-lien, is repaid first. The remaining $9 billion, called subordinate-lien, get second dibs. $1.2 million of interest is due in February and again in May. Senior Cofinas maturing in 2040 last traded for an average yield of 9.5 percent, while subordinate ones yielded 18 percent.
  • General-obligations: $12.6 billion. The debt backed by the commonwealth’s full faith and credit. The island’s constitution says general obligations must be repaid before other expenses. Puerto Rico owes $357 million of interest in January and an additional $805 million of principal and interest is due July 1. Securities due in 2035 last traded for an average yield of 11.5 percent.
  • Puerto Rico Electric Power Authority: $8.2 billion. Prepa, as it’s called, is the island’s main supplier of electricity and repays the debt from what it charges customers. The utility owes $196 million of interest in January and $420 million of principal and interest July 1. Prepa is negotiating with bond-insurance companies after reaching an agreement with some of its bondholders, who agreed to take a 15 percent loss. Bonds maturing in 2040 last traded at an average yield of 9.2 percent.
  • Puerto Rico Government Development Bank: $5.1 billion. The GDB lends to the commonwealth and its localities. When those loans are repaid, the bank can pay off its debt. The bank owes $354 million in December and $422 million in May. Federally taxable bonds maturing in 2019 last traded for an average yield of 57 percent.
  • Puerto Rico Highways & Transportation Authority: $4.6 billion. The highway agency repays its debt with gas-tax revenue. It owes $106 million of interest in January and $220.7 million of principal and interest in July. The commonwealth has the ability to divert revenue that cover some highway bonds to pay its general-obligation securities, if there are no other available resources, according to the island’s most recent financial disclosure. Bonds maturing July 2028 last traded for an average yield of 32 percent.
  • Puerto Rico Public Buildings Authority: $4.1 billion. The PBA bonds are repaid with lease revenue that public agencies pay for their office buildings. The agency owes $102.4 million of interest in January and $208 million of principal and interest in July. Bonds maturing 2042 last traded for an average yield of 10.4 percent.
  • Puerto Rico Aqueduct & Sewer Authority: $4.1 billion. The utility, called Prasa, supplies most of the island’s water. The debt is repaid from water rates charged to customers. The water agency owes $86.5 million of interest in January and $135.1 million of principal and interest in July. Bonds maturing in 2042 last traded at an average yield of 8.7 percent.
  • Puerto Rico Pension-Obligation Bonds: $2.9 billion. The taxable debt was sold to bolster the island’s nearly depleted pension fund. The bonds are repaid from contributions that the commonwealth and municipalities make to the retirement system. The system pays $13.9 million of interest every month in this budget year. Securities maturing in 2038 last traded for an average yield of 22 percent.
  • Puerto Rico Infrastructure Financing Authority: $1.9 billion. Called Prifa, the agency has sold the island’s rum-tax bonds. These are securities repaid from federal excise taxes on rum made in Puerto Rico. Prifa owes $37.2 million of interest in January and $77.8 million of principal and interest in July. Bonds maturing in 2046 last traded for an average yield of 28 percent.
  • Puerto Rico Public Finance Corp.: $1.09 billion. The bonds are repaid with money appropriated by the legislature. The agency has defaulted every month since August on its debt-service payments because lawmakers failed to allocate the funds. It owes interest every month, the largest being a $24 million payment in February. Bond maturing in 2031 last traded for 7 cents on the dollar, according to trade reports. The yield wasn’t disclosed.

Stay tuned.