Prepa Submits Recovery Plan as Creditors Say Talks Continue

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Puerto Rico’s junk-rated power agency presented a restructuring plan to creditors that recommends at least $2.3 billion of investment to modernize operations and restore its finances. Bondholders said the proposal is a basis for further talks, while calling some aspects “unworkable.”

The utility, known as Prepa, owes nearly $9 billion and faces a $416 million principal and interest payment July 1. It can’t support debt service through existing cash flow, according to the plan released Monday. The authority is seeking to revamp its systems, reduce dependency on oil and lower electricity costs that are double those on the U.S. mainland.

Puerto Rico and its agencies have $72 billion of bonds, almost a third of which is held by hedge funds, according to Mikhail Foux, a municipal debt strategist at Barclays Capital in New York. A Prepa restructuring would be the largest ever in the municipal market and may offer a framework for how other commonwealth entities could overhaul operations and lower debt. The success of the talks will depend on how much both sides are willing to give up, said David Tawil, co-founder of hedge fund Maglan Capital LP.

“It all depends on how far either side has dug in their heels,” said Tawil, who manages $80 million in New York. “I hope that the bondholders are willing to give up something in order to allow this to move forward.”

Burden Sharing

The agency’s plan, which doesn’t outline any potential bondholder losses, proposes to share the burden of the overhaul between ratepayers, creditors, workers and management. It sets a goal of reaching an agreement by June 30.

The report is a basis for “further collaboration,” according to Stephen Spencer, a managing director at Houlihan Lokey, financial adviser to Prepa bondholders. The agency in August signed an agreement with bondholders, insurance companies and banks that gave the utility time to develop a restructuring plan. That accord has been extended three times and ends Thursday.

“While elements of the plan were positive from our perspective, there were also aspects that were unworkable and will require further negotiation,” Spencer said in an e-mailed statement Monday.

The utility will make an announcement on the forbearance agreement before the June 4 deadline, Lisa Donahue, Prepa’s chief restructuring officer, said in a statement.

“We look forward to continuing to work closely with all of our stakeholders to come to an agreement on the path forward,” Donahue said.

Outside Hands

Outside investors chosen through competitive bidding would upgrade the system, according to the plan. Prepa is also considering a potential outside operator to manage it. The changes would potentially save $318 million annually by 2018.

Prepa “is a public corporation in serious decay, which is inefficient, politicized, and incapable of fulfilling its financial and environmental obligations, among others,” Governor Alejandro Garcia Padilla said in a statement. “The transformation must be completed at all levels.”

A challenge for the discussions is finding common ground between traditional municipal investors, who have held the debt for years and hedge funds who’ve bought in the past two years anticipating a restructuring, Tawil said.

“It makes some funny bedfellows,” Tawil said.

As the utility sorts out its finances, lawmakers on the island are working to fill a budget deficit and arrange a $2.9 billion bond deal to raise cash. An agreement to raise the sales tax has spurred a rally in commonwealth debt by easing concern over a potential cash crash.

Puerto Rico securities have gained for 13 straight days through Monday, the longest stretch since July 2014, S&P Dow Jones Indices show.

General obligations maturing in July 2035 traded at an average price of 83.9 cents on the dollar Tuesday, up from below 80 cents in mid-May and close to a two-month high, according to data compiled by Bloomberg.

Prepa debt maturing in July 2037 traded Monday at an average price of 55.6 cents on the dollar, up from about 51 cents in mid-May. The securities reached as low as about 36.5 cents in July 2014.

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