On Friday morning, creditors and the Puerto Rico Electric Power Authority (PREPA) reached a “tentative” agreement to restructure the Puerto Rico power provider’s $8 billion in outstanding debt. A “tentative agreement,” legally speaking, is one that has been agreed upon by negotiating parties but still needs to be voted on and ratified by each side.
Our Initial Thoughts
We expect that the gas dividend from $35 oil is having an impact. As part of the agreement, PREPA will be selling securitized bonds backed by power surcharges to refinance prior indebtedness. To sweeten the deal for securitized bondholders, the insurers have agreed to provide a $450 million first-loss equity buffer in case revenues fall short, in order to redeem principal and pay interest.
Bondholders will recover 85% of par in conjunction with this transaction. That’s a mere 15% haircut. We have long advised that haircuts on debt would be no greater than 20%–30%. PREPA bonds have traded as low as $0.50 cents on the dollar during the last year.
Historically, municipal-bond recoveries have averaged 80%. So this agreement is right in line with historical precedent. Bond insurer losses are capped in this transaction and even have UPSIDE in the event that revenues exceed expectations.
We like the idea of structured financing for infrastructure projects. This introduces a new investor class for financing public infrastructure. A Puerto Rico or Infrastructure CDO is what Puerto Rico is attempting to implement to save its public power utility.
Markets Seem To Like It
Bond insurers’ stock prices and uninsured debt is trading higher. In Puerto Rico, we’ve learned to take positive revelations with a grain of salt: A good headline today can easily be a bad one tomorrow. Until a deal is ‘inked’, there is still a tremendous degree of uncertainty including, among other factors, legislative approval. PR is still jockeying for position in its restructuring efforts.
Headlines could easily change and legislative outcomes could surprise.
Remember, HEADLINES MATTER.
This commentary was written by Shaun Burgess, Michael Comes, and David Kotok.