By The Star Staff
Confidential mediation documents submitted to the markets this week by the Financial Oversight and Management Board and Puerto Rico Electric Power Authority (PREPA) bondholders show that they still have a long way to go in settling the utility’s $9 billion debt.
The documents submitted to Electronic Municipal Market Access (EMMA) show that on Oct. 1, the bondholders approached the oversight board with a settlement proposal that was rejected by the board on Oct. 7 contending that it was not a proposal and would lead to higher power rates.
The bondholders’ settlement proposal addressed four issues. Throughout the recent Title III plan process and at the confirmation hearing, a critical, if not central, component of the oversight board’s platform was that electricity rates must not result in customer burden in excess of a 6% share of wallet.
“Our revised proposal specifically adopts that metric,” the creditors said. “For settlement purposes only, our proposal accepts that rates not result in a customer burden for electricity of over a 6% share of wallet and we propose incorporating mechanics to prevent such rates from going up or down for 50 years, except as may be needed to cover operating expenses that exceed budget, or pay for capital expenditures not covered by our proposed new money bond financing (if accepted) and/or funding from FEMA [the Federal Emergency Management Agency] and/or HUD [the federal Department of Housing and Urban Development].”
The oversight board had expressed concern about making a deal that would expose PREPA to default risk.
“In response, we have revised our proposal to eliminate default risk,” the creditors said. “We have proposed two series of take‐back bonds, one that would only mature when paid in full through a cash sweep mechanism (with PIKable interest), and a second that would be paid only from free cash flow, if any, and that would expire at 50 years regardless of how much, if any, has been repaid.”
The oversight board has repeatedly indicated that it did not want to agree to go‐forward bond obligations that would exceed PREPA’s ability to pay.
“We agree the bondholders should only be paid what PREPA can afford, not more and not less,” the creditors continued. “To ensure that is the case, rather than attempting to randomly pick a number that could be too high or too low, we propose setting the amount of take‐back debt by first agreeing on a set of financial projections (which we obviously don’t currently have) and then using those projections to set the amount of our tranche A debt at a level that the parties reasonably believe could be repaid in 35 years as per the projections but with no default if that doesn’t happen.”
To address this need, “we are prepared to negotiate terms for, and commit to provide, $2.5 billion of new pari passu revenue bond financing,” the bondholders said.
“We believe that this new money proposal is important, not only because it addresses PREPA’s immediate funding needs, but also because the bondholders’ willingness to invest fresh capital demonstrates our confidence in PREPA’s prospective viability,” they said. “Notably, our proposal also protects the legacy pension obligations and contemplates all‐cash settlements with the UCC and the Fuel Line Lenders.”
The oversight board replied that the Oct. 1 framework is not a proposal.
“It leaves blank the amounts to be repaid. It also contains multiple vague and unspecified terms,” the board said. “The framework’s premise is that the parties should negotiate each variable necessary to determine how much debt can be repaid. To the extent, however, [that] a variable is within the exclusive domain of the Oversight Board, such as fiscal plans and budgets, or a variable impacts whether Puerto Rico’s people and economy can afford power and attract new business, such as how the 6% share of wallet (SOW) principle should be applied, the Oversight Board will not subject these variables to horse-trading, and never has.”