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PUERTO RICO BONDS (PRASA)

Thursday, Oct 12, 2017

Puerto Rico Aqueduct and Sewer Authority (PRASA) Confidential Debt  Talks With Bondholders Revealed… Final Consensual Agreement May Avoid A Bondholder Haircut...

Confidential bond restructuring negotiations with bondholders are currently taking place behind closed doors as the Commonwealth, bondholders and the court are all seeking consensual restructuring agreements.

The Puerto Rico Aqueduct and Sewer Authority is negotiating a restructuring of its publicly owned revenue bonds that would not reduce or haircut principal owed to bondholders.

It has been disclosed over the past four months, PRASA and bondholders have discussed temporarily postponing or making smaller interest payments over the next two years, extending final maturities, and lowering current interest rates. This is according to a disclosure on the Municipal Securities Rulemaking Board's EMMA website. 

The impact of Hurricanes Irma and Maria is still being assessed, the authority said in the statement on EMMA. All parties have expressed a willingness and desire to resume discussions at the earliest appropriate time.

Discussions are currently taking place outside court supervised restructurings affecting $13.3 billion of general obligation bonds, $17.6 billion of COFINA sales tax bonds and other bonds. PRASA's bonds traded up almost 20 points to 70 cents on the dollar, positive news greatly affects depressed pricing.

As of June 30 PRASA had $5 billion in total debt. Of this, $3.3 billion was for publicly held revenue bonds and $285 million was for refunding bonds. PRASA owed $974 million to the U.S. Department of Agriculture and U.S. Environmental Protection Agency. The authority owed a remaining $477 million to either the Government Development Bank for Puerto Rico or for bonds issued through the Puerto Rico Public Finance Corp.

On June 19, according to documents posted to EMMA, in general terms PRASA offered an initial restructuring where the revenue bonds would be converted into convertible zero interest 5% capital appreciation bonds. These would be converted into cash pay bonds after two years. The maturities would be extended so that the latest maturity would be in 2057 rather than 2047. The EMMA website has made more specifics.

After two years of deferred accretion at 5%, the bonds would pay 5% interest starting in fiscal year 2020.The call terms weren't specified. In this proposal the USDA Rural Development bonds and the EPA State Revolving Fund loans would be treated more harshly but still not have their principal cut. They would be converted into junior revenue bonds with very low interest rates and longer maturities.

On August 18 PRASA bondholders made an alternate offer that included reduced but not zero interest payments over the next two fiscal years, 5.5% interest rates and a final maturity of existing debt in 2047.

In September the authority made a new offer. Some of the revenue bonds would be converted to current interest bonds and others into convertible two-year capital appreciation bonds; the negotiations will continue.

Negotiations on other Puerto Rico debt continue as the Commonwealth and bondholders seek to reach consensual agreements guided by the PROMESA law that regulates the Commonwealth's restructuring process. Based on current discussions with the Commonwealth, G.O. bondholders have asked the Court to extend an October hearing to mid-November. The COFINA court hearing is still scheduled for early December with a ruling expected shortly thereafter. If a consensual agreement is reached on the COFINA bonds the December hearings will not be necessary.

If you have any questions or desire updated information contact your GMS Account Executive. Information taken from sources deemed reliable. This update does not purport to include all available information

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