Puerto Rican power utility’s $8.3bn restructuring deal cancelled

May 2022 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

May 2022 Issue

After a long struggle, Puerto Rico has finally begun to exit bankruptcy, but its electric utility, the Puerto Rico Electric Power Authority (PREPA), is still grappling with around $9bn in debt. Confounding expectations, in March Puerto Rico’s governor Pedro Pierluisi announced the cancellation of a plan that would have raised power rates for almost five decades in order to pay bondholders and eliminate a significant chunk of the island’s debt.

However, the plan, which had been in the works for several years and which was delayed by the outbreak of the coronavirus (COVID-19) pandemic, was called ‘unfeasible’ by Mr Pierluisi. The plan was expected to be approved after Puerto Rico’s government began to emerge from bankruptcy after declaring in 2015 that it was unable to pay its more than $70bn public debt load. PREPA holds more than $9bn of that debt, the largest of any government agency, and economists consider restructuring that debt key to the island’s economic progress.

Mr Pierluisi said that the current proposed deal is neither feasible nor in Puerto Rico’s best interest. “I am committed to achieving (the company’s) exit from bankruptcy,” he said, adding that he supports a deal that would ensure an efficient, cleaner and reliable electric energy system for the island. The federal control board that oversees Puerto Rico’s finances and the ongoing bankruptcy-like process in federal court, the Financial Oversight and Management Board (FOMB), said it supported Mr Pierluisi’s decision, though it noted that the plan would have cut the power company’s debt by 32 percent and that legislators whose approval was needed “unfortunately rejected some of the key terms as unacceptable”.

The FOMB noted that it expects to negotiate a new resolution via mediation or another process in the future. Both FOMB and the governor’s office have cited ongoing worldwide economic uncertainty, such as rising inflation and surging oil prices, as having an impact on the decision to scrap the deal. There have been notable geopolitical developments since the agreement was negotiated with creditors in 2019. “The global COVID-19 pandemic, rising fuel prices because of Russia’s attack on Ukraine, and rising inflation left Puerto Rico with a different economic reality,” FOMB said in a statement.

The restructuring agreement would have cut PREPA’s debt by more than 32 percent and included “significant protections” for residents and businesses, according to FOMB, but the agreement needed approval from lawmakers, who refused without changes to key terms in the deal, the oversight board noted.

The cancelled debt restructuring deal would have raised Puerto Rico’s electricity prices by between $0.027/kWh and $0.046/kWh for the next 47 years, according to the Institute for Energy Economics & Financial Analysis (IEEFA), which explained that the plan, “ignores Puerto Rico’s financial vulnerability and puts the future of its energy grid at risk”.

Efforts to reorientate the island’s energy production have been under way for some time. Puerto Rico previously announced plans to use natural gas as a bridge to reach 100 percent renewables by 2050. In February, the Biden administration and Puerto Rico launched a joint effort to accelerate the growth of renewable energy resources and strengthen the island’s grid, promising 2022 will be “a year of action”. The island will receive significant funding from the Federal Emergency Management Agency (FEMA) in the coming years to strengthen its power grid.

Some of the island’s creditors are uneasy about the latest developments, however. In 2017, after Hurricane Maria decimated Puerto Rico’s electricity grid, the island signed several deals with Cobra Acquisitions, a subsidiary of Mammoth, to restore energy services. Mammoth says it was paid for some of the work, but fears some of Puerto Rico’s arrears could be lost through the debt restructuring process. In total, Mammoth says it is owed $344m, including $117m in interest charges.

“This is yet another example of Puerto Rico and PREPA continuing their resistance to pay their bills,” said Arty Straehla, chief executive of Mammoth in a statement. “I commend Judge Laura Taylor Swain for directing the Puerto Rico Fiscal Management and Oversight Board to advance a new deal for PREPA immediately. While PREPA has begun addressing amounts owed to post-bankruptcy creditors, Mammoth’s subsidiary Cobra Acquisitions LLC is still owed more than $340 million dollars for work completed nearly three years ago. PREPA is running out of excuses, and it is well past time for them to make their creditors whole.”

Richard Summerfield