Puerto Rico's power authority PREPA has reached a deal with its lenders to restructure $700 million in matured debt, a significant step in turning around the utility after it clinched a deal with bondholders earlier in September, Reuters reported yesterday. Finding a solution for PREPA has been seen as a critical test for the U.S. territory, weighed down by a $72 billion debt, as it tries to reach agreement on a broader restructuring of its borrowings. PREPA said that the deal was reached with its fuel-line lenders — a syndicate of Puerto Rican banks and asset manager Solus. They are being given the option to either convert existing credit to term loans with a fixed interest rate of 5.75 percent over 6 years, or to exchange their principal for new securitization bonds.
Puerto Rico’s main electricity provider, PREPA, failed to extend a contract with its bond insurers that has given the power company time to negotiate a way to restructure its $8.3 billion of debt, Bloomberg News reported on Saturday. PREPA’s failure to extend the forbearance agreement with the insurers marks a setback for the utility, which earlier this month struck a tentative deal with some of its bondholders to reduce its debt load. Insurers that guarantee $2.5 billion of the utility’s debt balked at extending the talks. The forbearance keeps negotiations outside of court. Bondholders agreed to extend the forbearance contract to Oct. 1, while fuel-line lenders pushed the expiration deadline to Sept. 25.
The U.S. Treasury Department said yesterday that Congress should provide Puerto Rico with access to a restructuring regime to help the commonwealth deal with its fiscal challenges, Reuters reported yesterday. "Without federal legislation, a resolution across Puerto Rico's financial liabilities would likely be difficult, protracted and costly," the Treasury Department said in a statement. With Puerto Rico projected to exhaust its liquidity later this year, Congress "must act now" to provide the island with access to restructuring, the statement said.
A week after the governor of Puerto Rico laid out a plan for attacking the island’s heavy debt, analysts are beginning to publicly question the proposals and even the financial assumptions on which they are based, the New York Times reported today. The doubts suggest that Gov. Alejandro García Padilla’s strategy to persuade bondholders and other investors to voluntarily help the island restructure the debt — and take losses on their investments as a result — is a long shot. One credit analyst, Ryan Brady of Morgan Stanley, said that it appeared that the planners had greatly overstated Puerto Rico’s financial needs over the next five years. As a result, he said in a private presentation to clients, Puerto Rico was hoping to get $14 billion in concessions from its creditors, when in fact it might need as little as $5.7 billion. And Sergio M. Marxuach, public policy director for the Center for a New Economy, a research institute in San Juan, P.R., said yesterday that the five-year plan appeared to be “tilted toward austerity rather than growth,” which could undermine its key goal of reviving the island’s economy.
There were 43 lobbying filings related to bankruptcy issues in the second quarter of 2015, up 26 percent from the previous quarter, according to a Bloomberg Government analysis on lobbying trends. The lobbying filings were up 72 percent from the second quarter of 2014 when there were 25 such filings, the data show. In the second quarter of this year, there were a total of 12 new filings by 11 separate companies that added bankruptcy as a lobbying issue, the BGOV data show. The increase is probably being driven by lobbying on issues related to Puerto Rico, according to BGOV. Seven of the 12 new filings referenced Puerto Rico or H.R. 870, which is the bill that would allow Puerto Rico's municipalities to file for bankruptcy protection, the data show.
A group of Hispanic members of Congress called on the Treasury secretary, Jacob J. Lew, to take a more muscular role in Puerto Rico’s debt crisis and prevent what they said could become “an economic catastrophe” on the island, the New York Times reported today. The eight lawmakers, all Democrats, said that bankruptcy was the “best hope” both for Puerto Rico and its many creditors on the U.S. mainland. They urged Lew to work with Congress to move two pending bankruptcy bills forward, and to intervene in other ways, as Treasury secretaries did during the financial crisis of 2008. Read more.
The comprehensive proposal offered by Puerto Rico Gov. Alejandro García Padilla of Puerto Rico for reversing the territory’s downward financial spiral could actually work, but only with a major assist from Congress, according to a commentary in yesterday’s New York Times. Although the Puerto Rico Fiscal and Economic Growth Plan released last week outlines a wide range of proposals, its essence lies in two key features: Puerto Rico would establish a financial control board with broad budgetary authority, and it would restructure much of its $71.1 billion debt burden, according to the commentary. Fiscal reform alone isn’t enough, since a $14 billion financing gap will remain through 2020, according to the new plan’s estimates, even if all the reforms are implemented. The simplest way for Puerto Rico to achieve its other key objective, reducing the payments on its debt, would be for its public electricity provider, PREPA, and other troubled service corporations to restructure their debt in municipal bankruptcy, according to the commentary. Read more.
Morgan Stanley said that Puerto Rico’s attempt at a sovereign-like debt restructuring without complete lawmaking authority is likely to fall short in the absence of congressional intervention, Bloomberg News reported on Friday. “We doubt Puerto Rico’s ability to execute this style of restructuring without U.S. Congressional action, keeping us from adopting a clearly bullish position,” Michael Zezas, chief municipal strategist at Morgan Stanley in New York, wrote in a report dated Sept. 10. Puerto Rico’s fiscal crisis should spur Congress to help the island negotiate with its creditors, either by implementing a fiscal control board at the federal level or allowing some public corporations to file for chapter 9 bankruptcy projection, Morgan Stanley said. Unlike cities and municipalities of U.S. states, the island’s localities cannot access chapter 9. Governor Alejandro Garcia Padilla’s administration on Wednesday unveiled a proposal that estimates Puerto Rico will have only $5 billion of available funds to repay $18 billion of debt-service costs over the next five years. Read more.
Puerto Rico plans to present a debt-restructuring offer in a few weeks to address a projected $13 billion shortfall in bond payments due over the next five years that the commonwealth says it can no longer afford to pay, Bloomberg News reported yesterday. “We’ll be ready with a first proposal as to how to make the $18 billion worth of contractual debt service fit to the available resources we have under this plan,” Jim Millstein, the island’s chief restructuring adviser, said in San Juan, after Governor Alejandro Garcia Padilla’s administration released what they’re calling a fiscal and economic growth plan. Puerto Rico said that it only has $5 billion available for the payments. Prices of some of the commonwealth’s bonds, which have been trading at distressed levels, fell after Puerto Rico made it clear in the proposal that it would seek to force losses on most debt investors. It will also pursue a moratorium on principal payments for several years, according to Melba Acosta, the island’s main debt official. Read more.
In related news, Puerto Rico Governor Alejandro Garcia Padilla wants bondholders to accept less than they’re owed to help the island dig out from its fiscal crisis, but few may be willing to go along, according to Moody’s Investors Service. “It is unlikely that holders of the many Puerto Rico bonds will agree to forgo or defer substantial sums of promised principal and interest,” said Moody’s analyst Ted Hampton. “There is a high probability of protracted litigation, particularly on the part of investors holding general obligation or other securities with strong legal protections.” The expected bondholder response shows the difficulty Puerto Rico faces as it embarks on a restructuring unprecedented in the $3.6 trillion municipal market. Puerto Rico general-obligation bonds are protected by the commonwealth constitution and others are backed by dedicated revenues, which may lead some investors to challenge the island in court. Read more.
Puerto Rico said that it faces a $13 billion funding shortfall for debt payments over the next five years even after taking into account proposed spending cuts and revenue enhancement measures outlined in a long-awaited fiscal and economic growth plan. The report, crafted by Governor Alejandro Garcia Padilla’s administration and released today, said Puerto Rico will seek a consensual compromise with creditors to restructure its debt to avoid a legal morass that could further weaken the economy, according to materials provided in a press briefing. No estimates were provided of potential losses for the owners of Puerto Rico’s $72 billion in debt. The proposal paints a dire picture of Puerto Rico’s finances and the consequences to the island’s 3.5 million residents. The commonwealth will have only about $5 billion of available funds to pay $18 billion of principal and interest payments coming due from 2016 to 2020. That’s after anticipated savings from the consolidation of 135 public schools, reductions in health-care spending, additional subsidy cuts and reductions in payroll expenses. The estimate excludes the island’s electric and water utilities. The plan didn’t specify which of Puerto Rico’s various debt issuers would be restructured. Read more.
New York Gov. Andrew Cuomo led a delegation to Puerto Rico on Monday in hopes of helping the territory address its debt crisis, saying the situation “is threatening the livelihoods of millions of people — many with strong connections to New York,” the Wall Street Journal reported today. Cuomo said that he supported giving Puerto Rico the ability to pursue bankruptcy protection, a position that puts him in line with most of his fellow Democrats. Cuomo also endorsed the notion of giving Puerto Rico “relief from the Medicaid cap,” saying that the territory should have “fairness” with regard to Medicaid reimbursement. Prominent Democrats, including Puerto Rican New York City Council Speaker Melissa Mark-Viverito and presidential contender Hillary Clinton, whom the governor has endorsed, have long backed giving Puerto Rico’s municipal agencies the ability to seek chapter 9 bankruptcy.
