The Puerto Rico Electric Power Authority (PREPA) announced last Wednesday that it had reached an agreement to restructure a portion of its $8.6 billion of outstanding power revenues bonds. Holders of about 35% of the bonds agreed to exchange their current holdings for new bonds at a loss of 15% of the par value of the outstanding debt. With the debt reduction, as well as deferral of principal payments for five years, PREPA’s debt will be cut by $670 million, and it will save more than $700 million in debt service costs over the next five years. Pricing of PREPA bonds, which had been trading at prices much lower than the workout price of 85 cents on the dollar, soared after the announcement.
The announcement arrived in the midst of the commonwealth’s initiative to restructure its bloated $72 billion bond portfolio, which will be incorporated into the Fiscal Stability Plan expected to be released this week. While PREPA was able to extract some concessions from its bondholders, the commonwealth’s ability to reduce its other debt liabilities will be dependent on a number of factors. While some PREPA bondholders are now willing to take a haircut on the par value of the bonds they hold, there are holdouts even after a year of negotiations for a credit that has basically been insolvent. In fact, most of those willing to exchange their holdings are hedge funds who will make money under the agreement, as they had purchased PREPA bonds at prices well below 85 cents.
Bond insurers who guarantee interest and principal of bonds will want to minimize the impact from any commonwealth bonds they guarantee. We have also seen Puerto Rico default on bonds with the weakest bondholder protections while continuing to pay debt service on most of its other obligations. We expect that holders of Puerto Rico debt with solid legal provisions and strong coverage levels will be in a more advantageous negotiating position than those holding weaker credits. We also expect to see conflicts between hedge funds who purchased debt at a deep discount and bond funds and bond insurers who have invested over a longer period.
Source: PREPA, Bloomberg