Puerto Rico Breaking PREPA Deadline

DEC 7, 2015

PREPAPuerto Rico Governor Alejandro García Padilla chose to break a midnight deadline to pass energy legislation, casting doubt on the Puerto Rico Electric Power Authority’s prospects for a consensual debt restructuring agreement.

The authority had set a series of deadlines in November, when it released a Restructuring Support Agreement with three of its four creditor groups. PREPA said if the deadlines weren’t met the creditors would be free to take legal action.

PREPA said the agreement with creditors rested in part on passage of energy legislation by late November, a deadline that was later extended to midnight on Monday.

A spokeswoman for Jaime Perelló, president of the Puerto Rico House of Representatives, attributed the governor’s decision against calling a special session to the U.S. Supreme Court agreement Friday to hear a case concerning the validity of Puerto Rico’s Public Corporations Debt Enforcement and Recovery Act. The act, which would provide a bankruptcy law for the island’s public corporations, was rejected by two lower courts.

“The governor has chosen to put the PREPA deal in jeopardy,” a person connected to PREPA’s debt talks said in an email. “It is a poor public policy decision with a high cost to the Puerto Rican people as delaying execution of the PREPA deal will cost Puerto Rico approximately $275,000 a day in missed interest savings alone. The failure to advance legislation also suggests the government isn’t negotiating with its creditors in good faith.”

PREPA efforts to reach a consensual agreement with creditors on about $8.6 billion of bond debt were seen as a possible model for the island’s debtors as they attempt to restructure about $70 billion, which the governor has said is un-payable in the current economy.

When the energy legislation was introduced to the legislature in mid-November, legislators said they didn’t have enough time to consider and act on it before the session ended on Nov. 17. The legislature wasn’t scheduled to meet again until early January.

The governor’s office said Monday that García Padilla may still call the special session and was in discussions with the presidents of the Puerto Rico Senate and House of Representatives about the matter. The person speaking for the governor said that the Supreme Court decision wasn’t a factor in deciding when or if a special session would be called.

The Supreme Court is expected to hear the bankruptcy case no earlier than March and isn’t expected to rule until June.

The authority is currently negotiating with three bond insurers. The authority’s restructuring support agreement has a deadline of the end of Thursday to reach an agreement with the insurers. In testimony to the United State Senate on Dec. 1 García Padilla said that there was one creditor that was holding up reaching a deal.

On Thursday a source connected with these negotiations said that the bond insurers were close to reaching a deal.

PREPA’s bond trustee, U.S. Bank National Association, posted a notice Thursday to the Electronic Municipal Market Access web site announcing, among other things, that it had only $24 million to make an authority payment due Jan. 1. Municipal Market Analytics’ Weekly Outlook said the authority owes $207 million for this payment.

In the Weekly Outlook MMA writers said that even before the governor’s delay in submitting legislation, legislative approval of the reforms called for in the restructuring support agreement “seemed unlikely.” Legislators have “shown resistance to the idea of converting PREPA’s rate-approval process into a rubber stamp, a conversion that is absolutely critical for the structured finance security contemplated as PREPA’s exit vehicle.”

BTIG analysts Mark Palmer and Giuliano Bologna wrote in a report Monday that the Supreme Court action and the report that the governor wouldn’t call a special session to consider legislation “have apparently reduced the likelihood of an agreement between the Puerto Rico Electric Power Authority and its creditors by Jan. 1, which has been described by the management of some of the companies that insure the utility’s debt as the ‘drop dead date’ for a deal to be struck.”

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