This past week was an incredible whirlwind for PREPA. The Forbearance agreement with bondholders required PREPA to provide a business plan by December 15, 2014 and a “recovery program or debt enforcement plan” by March 2, 2015. It complied with neither. Ms. Lisa Donahue informed the public that PREPA had requested an extension until June to provide them but the forbearing bondholders remained silent.
During the weekend of March 27-29, PREPA and the bondholders continued negotiations to see if the authority would have to pay the banks $671 million once the Forbearing Agreement expired on March 31st. What we got was an agreement to extend the period to negotiate and the Forbearance until April 15 but at any time during this period 25% of the holders of interest could terminate the agreement.
During the negotiations, some say March 15, the Amendment to the Forbearance says March 26, the bondholders gave PREPA a proposal by Houlihan Lokey, PA Consulting and GE which was released to the public on March 31 The gist of the proposal is that these entities will provide funding to finish Aguirre, not increase rates and add more employment and renewable energy sources. Sounded great, maybe too great.
PREPA and Ms. Lisa Donahue were not happy with the disclosure of the offer by Houlihan & Co. Obviously, losing control of the plum of generation, the Aguirre plant and having to buy the electricity it generates does not seem to be appreciated by PREPA. Ms. Donahue hinted that the disclosure to the public was not complete but provided no new information. As usual, Governor García Padilla maintained his silence as if it were not with him or he was not in charge of Puerto Rico. Or perhaps he is waiting for Congress to amend Chapter 9 so he can continue controlling PREPA? The only problem is that Congress will not very likely act within the next eleven days, which is all the time left.
All this leaves the Puertorrican consumer floundering around. The consumer of electricity knows that PREPA has been floating around the idea of a rate increase and Houlihan’s offer seems to put that to rest. If PREPA does not accept the Houlihan offer, passed down with what one can assume is the Bondholders’ blessing, it could force them to withdraw from the agreement and proceed to sue the authority. What could happen later? The banks could sue PREPA for the $671 million and eventually win. Since the banks are not bondholders, the could not trigger the 1974 Trust Agreement remedies or 22 L.P.R.A § 207(b) remedies. As little as 25% of the Bondholders could, however, request a receiver pursuant to the aforementioned section and proceed to administer PREPA, with the probable power to raise rates. Whether this receiver would have the power to get into an agreement with Houlihan is questionable, however. When the Aqueduct and Sewer Authority of PR was to be administered by another entity, legislation had to be enacted. But if the Houlihan offer is declined, Bondholders may have no other recourse. Moreover, all this must be decided on or before April 15, 2015.
In any event, Houlihan’s offer should be carefully examined. The problem is that PREPA is as opaque as usual and will not provide the consumer with the information we need in order to understand what is being offered and if it is good or not so good. It seems that our political leaders have once again decided to deny us knowledge.
I have not been surprised by the offers on PREPA’s table today. The diversification for power generation follows a Federal mandate and EPA regulations. Also, Act 57, the Puerto Rico Energy Act, requires for certain percentage of the island’s generated power to being generated by renewable sources in the next decade or so. So far, we have not seen any significant changes being proposed under the current proposals. The power distribution would continue to being under PREPA’s control. The development of new generation plants or renewable sites, called Mini-Grids, is a way of diversifying the sources or energy as they also reduce the risk of downtime if any of these are affected by a natural disaster or by humans. I am still curious on Ms. Donahue’s Team offer to restructure PREPA to become an Efficienct and Profitable entity. Let’s see how the two proposals collide or merge into a final outcome.
It seems that April 15 will be the D-Day. Personally believe that there’s no other choice. PREPA will accept the Houlihan Lokey, PA Consulting and GE proposal just because they need the money to keep the operation up and running, and for future investing of course. But, there’s has to be a catch in all of this. BTW, nice blog, very informative.
Why do you think PREPA didn’t wait for Donahue’s proposal?
I’m probably missing basic points here but how is it possible to not raise rates and have some hope of paying the bond holders back?
The only alternatives I can see is (1) driving costs of operations way down or (2) recoup more money from the new generating plant.
It has to be number two but that can only be true if the rates are high enough to generate significant profit and all bond holders somehow have a stake in the plant. Does anyone know how the rate on the electricity sold to PREPA is to be priced and whether all bond holders have a stake in the plant?
Bottom-line, I’m trying to see if I understand what the bond holders strategy is.
Bondholders just want to get paid and it seems PREPA has very few options
Its very interesting. I see all sorts of options but they all assume raising rates or allowing bond holders to retain profits from decreases in prices from say a natural gas plant that can operate more efficiently than an oil fired plant.
Then again, I’ve never seen a government budget deficit that I couldn’t close as I’m always ready to increase taxes or decrease spending. For some strange reason (joking, I do get it) others don’t agree with me.
Something about PREPA that I had been missing is that some portion (I have no idea how much) is driven by the need to comply with emissions standards. I’ve wondered if the Supreme Court overturns the rules whether it would have a material impact on the dynamics of what needs to be done.
It would give PREPA several years to prepare but at oral argument it was 4-3 for the ELA with Kennedy an Roberts undecided