PREPA IS IN DIRE, DIRE STRAITS
Last night PR released the Basic Financial Statements and Required Supplementary Information fiscal year ended June 30, 2013. It has chilling admissions as to PREPA’s financial situation.
“PREPA currently faces heightened liquidity and market access risk as a result of thematurity in July and August 2014 of two short-term lines of credit in an aggregate principal amount of $671million. PREPA’s management is currently negotiating the renewal of these lines of credit with the corresponding commercial banks. PREPA’s ability to repay its outstanding lines of credit is limited and its ability to extend, renew or replace these lines of credit is uncertain. This raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Our opinion on the aggregate discretely presented component units is not modified with respect to this matter.” (underlining added Page 4 of the statement)
Later, the statement says:
“At June 30, 2013, PREPA had a net deficit of $791 million. Subsequent to June 30, 2013 PREPA has continued experiencing weak financial performance and currently faces heightened liquidity and market access risk stemming from the maturity of two short-term lines of credit (LOCs) and the required repayment of outstanding borrowings totaling $641 million in July and August 2014. PREPA’s management is currently negotiating the renewal of these lines of credit with the corresponding commercial banks. PREPA’s ability to repay its outstanding lines of credit is limited and its ability to extend, renew or replace these lines of credit is uncertain. In addition to this immediate liquidity need, PREPA has had material recurring operational deficits (negative cash flow), currently has a very high level of debt and faces large non-discretionary capital expenditure requirements, all while facing a declining demand for electricity. As a result, if PREPA is unable to address these issues in the short-term, it may need to seek relief under the Debt Enforcement Act. As of June 27, 2014, PREPA has set aside sufficient funds to cover the debt service payment due on July 1, 2014 on its revenue bonds.” (Underlining added, page 87 of the statement)
In other words, PREPA may pay today but it still has mayor liquidity problems and eventually will file for Chapter 2 protection. Clearly, if it does not do it today, Franklin and Oppenheimer’s lawsuit will suffer from a ripeness problem and could be dismissed. Stay tuned.