A preliminary deal with the owners of more than US$3 billion of Puerto Rico Electric Power Authority (PREPA) bonds, announced late Monday, puts the bankrupt utility on a controversial path toward privatization.
The restructuring agreement announced by a bondholders group largely made up of mutual funds and the utility would exchange existing bonds for new debt and link future payments to the island's economic recovery.
The deal marks a major development in the government-owned utility's four-year effort to restructure its debt. That process produced multiple proposals that were ultimately stymied, including one that was rejected by Puerto Rico's federal oversight board last year.
Monday's deal sent prices on some PREPA bonds higher in secondary market trading.
Governor Ricardo Rossello's office estimated the tentative agreement would result in more than US$3 billion in debt service cost savings over 20 years, while the debt restructuring process aimed at transforming and privatizing PREPA.
With a debt load of US$9 billion, PREPA filed for bankruptcy in July 2017. Its financial and operational problems were compounded by Hurricane Maria, which slammed into the island in September, decimating an electric grid already struggling due to poor rate collection, heavy management turnover and lack of maintenance.
Unlike previously proposed deals with creditors, the new agreement links future debt payments to Puerto Rico's economic recovery and minimizes risk to ratepayers by setting a fixed annual transition charge, according to the territory’s oversight board, which was also part of the agreement, at the expense of Puerto Rican taxpayers. That board was created by the U.S. Congress under the so-called PROMESA Act.
The agreement would give bondholders 67.5 cents on the dollar in the form of 40-year 'tranche A' bonds and 10 cents on the dollar in the form of 45-year 'tranche B' bonds that would receive excess cash flow once the tranche A bonds are repaid.
Some PREPA bonds due in 2042 traded at 61 cents on the dollar on Tuesday, up from 45 cents on the dollar earlier this month.
The preliminary agreement lays out several potential events that could result in its termination, including the dismissal of the bankruptcy case.
Not included in the preliminary deal are PREPA bonds backed by insurance companies that guarantee debt payments. Assured Guaranty, a bond insurer, said on Tuesday it will continue "to vigorously enforce our property rights as a secured creditor" in PREPA's bankruptcy case, while also seeking to consensually resolve matters.
The oversight board said that in addition to finalizing the deal, it seeks to reach debt restructuring agreements with insurers and fuel line lenders.