(GFR Media)

The Oversight Board and the government plan to file a motion with Judge Laura Taylor Swain on Monday to request her approval of the final Restructuring Support Agreement (RSA) with a group of the Puerto Rico Electric Power Authority (PREPA) bondholders and the municipal bond insurer Assured Guaranty. 

After 15 extensions to the preliminary agreement signed last October, the Board, the Fiscal Agency and Financial Advisory Authority (FAFAA) and PREPA agreed yesterday on a definitive RSA that would cut the utility´s debt by 32 percent. 

If PREPA's finances improve, then the cut would be reduced to 22 percent, as bondholders would be entitled to payment through a second set of bonds as a result of the transaction. 

Despite two extensions granted by Swain seeking to appoint a trustee in the public corporation, neither the Board nor the FAFAA, were able to convince National Public Finance Guarantee and Syncora Guarantee to endorse the agreement. 

"Discussions continue, but I can't talk about the quality of those discussions. The truth is that they are not in the agreement," said FAFAA executive director Christian Sobrino Vega to El Nuevo Día. 

Another group that did not support the RSA signed yesterday and that had previously supported the transaction, were financial entities that granted credit lines to PREPA for the purchase of fuel. The Unsecured Creditors Committee (UCC) does not endorse the agreement either. 

However, the Board will file its motion before Swain, including an agreement signed by the holders of 51 percent of PREPA's current debt. 

"With this agreement, Puerto Rico is sending a powerful message to the markets that we are taking the necessary steps to restructure our public debt," Sobrino Vega said. 

PREPA Executive Director José Ortiz said that the agreement helps to attract private investment (that PREPA would receive) since it eliminates the uncertainty over what remains to be paid. 

A particular milestone 

"This collaborative agreement represents a tremendous accomplishment while creating a clear roadmap to allow for PREPA’s ongoing transformation and provide the people of Puerto Rico with fair and consistent electricity rates," said the Ad-Hoc PREPA group in written statements, while acknowledging the efforts of the government, the Board and other creditors to reach a definitive agreement. 

"We have long made the case that the solution to Puerto Rico's difficulties is through consensual settlements," said Dominic Frederico, President, and CEO of Assured Guaranty, an insurer that supports 11 percent of PREPA's current bond debt. 

"We believe the restructuring transaction outlined in this new RSA can be the foundation for an effective, consensual plan that assures reliable, affordable electric power for the people of Puerto Rico," Frederico added. 

The RSA reached yesterday represents a crucial agreement in the island´s debt renegotiation process and, according to experts, represents a milestone of high economic impact. 

On one hand, the Board and FAFAA announced a definitive agreement in PREPA after, two years ago, the fiscal entity rejected a first agreement with the Ad Hoc-PREPA group. That agreement, which was the starting point for the current deal, came as AlixPartners and its executive Lisa Donahue arrived in PREPA to transform its operations as a condition established by bondholders. 

In that sense, the agreement announced yesterday came after a five-year-long negotiation process and bondholders not collecting for a similar period.

On the other hand, experts describe the deal as a success that would benefit Puerto Rico's economy since they have long argued that high energy rates are an obstacle to business activity and investment on the island. 

According to Sobrino Vega, the agreement is key to address administration challenges that contributed to PREPA's collapse and led bondholders and insurers to ask for a trustee in the public corporation. And this because, for the official, the RSA would facilitate the privatization of that infrastructure. 

The Board agrees 

For the Board, the privatization of PREPA and the creation of an energy market in Puerto Rico is so important that, according to the current fiscal plan, just that structural reform would contribute about three-tenths of the island's gross product in the coming years. 

Yesterday, Board President Jose B. Carrión said that "the agreement is a watershed moment in PREPA’s transformation from a bankrupt entity to an efficient, modern power provider and in the overall restructuring of Puerto Rico.” 

"We are moving forward with the negotiations for a plan of adjustment that would be the foundation for a new PREPA, as a privately operated, financially healthy electricity company able to attract investors," Carrión added in written statements. 

The points of the agreement 

The financial terms of the definitive RSA were initially revealed last October and confirmed by El Nuevo Día a week ago. 

In essence, PREPA bondholders will exchange their existing debt for two bonds. 

Under the agreement, investors will exchange their bonds at 67.5 cents on the dollar and a yield of about 5 percent. 

They will receive a second bond equivalent to another 10 cents on the dollar, which would be paid after the first set is completely paid and if PREPA's finances allow it. 

If that were the case, the final cut to the current PREPA principal would be close to 22 percent. 

 The transition charge 

According to Ortiz, the cut in the principal and debt service provides space for the public corporation to continue modernizing its infrastructure, and this would allow it to counterbalance the special charge that will be implemented to pay bondholders. 

Like the agreement signed in 2015, the definitive RSA will require the adoption of a transition charge to pay the debt. But, Sobrino Vega said that unlike that deal, the transition charge will not fluctuate if sufficient volumes of energy demand are not achieved. 

The new financing structure establishes a transition charge, which will increase steadily over the lifespan of the new bonds. 

Sobrino Vega said that this will start to appear in electricity bills as of next July when the transition charge will be partially implemented, approximately one cent per kilowatt-hour (c/kWh). 

If the agreement is definitive, by March 2020, the transition charge would increase to 2,768 c/kWh and, thereafter, the charge would increase annually to 4,552 cents per kWh for the 33rd year of the bonds. This charge would increase if, in effect, an agreement is reached with the firms that financed PREPA's fuel. 

Among other things, according to Sobrino Vega, the new agreement eliminates the solar energy tax, that is, the charge that would be imposed on those who decide to permanently disconnect from PREPA. Those who generate their own energy but continue to be connected to the grid will pay in the first few years, a fixed charge based on their previous consumption, the official explained. 

The agreement announced yesterday only covers PREPA's bond debt, which is about $8.3 billion. Then, there are some $700 million for the fuel purchase credit lines that are not in the RSA right now; another 3 billion for the debt with PREPA's retirement system employees and $52.2 million in interest exchange instruments or "swaps." 

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