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PUERTO RICO UPDATE PREPA Privatization Begins

Tuesday, Jan 23, 2018

Seema Balwada, CFA

PREPA Privatization Begins… Privatization Represents A Major Policy Shift… Bondholders Push For Privatization Gets Results… PREPA Ad Hoc Group Of Bondholders Want Consensus… Lower Energy Cost Benefits Economy…

Privatization of the monopoly electric utility makes way for better outcomes for PREPA bondholders. Mismanagement and poor governance was brought front and center by U.S. lawmakers and Puerto Rico’s bondholders. Merits of privatization are supported even by Puerto Rico’s Federal Oversight Board: “the corporate culture of PREPA is rotten and it is time to get out of it and inject private capital.” Calls, from many, to wrest control of a public asset from its corrupt overlords will be fulfilled. A private operator is expected to inject capital and modernize its electric grid in eighteen months. Governor Rosselló’ s decision to privatize marks a major policy shift of the Puerto Rico administration. For PREPA to become a regulated utility, a prospective buyer would need to assess how much capital would be required, negotiate with bondholders and have the ability to set rates without political interference. PREPA’s bondholders believe the only path forward will be if PREPA respects property rights and arrives at consensus debt restructuring. 

PREPA Privatization Begins…Governor Rosselló is moving to privatize PREPA. Privatization will be done in a three-stage process lasting 18 months. The first phase would be defining the legal framework through legislation, before issuing a request for proposals. The second is to evaluate the “technical, economic, and financial” merits of the submitted proposals. Finally, the terms and conditions for contracting the companies that have complied with the requirements would be negotiated; a concession would be granted for a defined term. Tesla, Sonnen GmbH, Sunnova and Arensis Corp. have all been reported in talks with Puerto Rico officials about buying PREPA. Puerto Rico’s Oversight Board has supported privatization, which bodes well for the move when presented in the U.S. District Court of Puerto Rico handling PREPA’s Title III debt restructuring. The move is a major development for the electric utility and the Island’s future prospects. According to Moody’s, a push to privatize Puerto Rico’s bankrupt power utility is a positive for the agency because it would provide more capital. “The PREPA privatization reflects a fresh approach to solving the utility’s problems, but much remains to be worked out,” Moody’s continued. Challenges include negotiating a price for PREPA as the utility faces the costs of modernizing an aging system, addressing pension liability and addressing debt. Unless the U.S. Government stays involved the 18 month timeline could be aggressive.

Privatization – A Major Policy Shift… Puerto Rico’s decision to privatize marks a policy shift on the Island. The move better aligns the Governor with bondholders and Puerto Rico’s Oversight Board as both support privatization. Until now, Governor Rosselló fought to keep control of PREPA as a public asset. Bondholders and the Oversight Board tried to install a receiver or an emergency manager or a Chief Transformation person but failed to convince Judge Laura Taylor Swain. Unabated mismanagement of public resources has been a top bondholder concern. The issue came in full view when armed federal agents discovered massive rebuilding materials kept away from power restoration. In the wake of Hurricane Maria, various PREPA contracting decisions raised concerns among members of Congress about the utility’s management. U.S. lawmakers questioned the Governor and former PREPA chief Ricardo Ramos when the two were deposed before two congressional committees in November 2017. U.S. lawmakers have been deeply cognizant that corruption, questionable governance and mismanagement has created problems for PREPA.

Bondholders Push For Privatization Gets Results… The transition from a government enterprise to a regulated utility is welcomed by bondholders. Potential buyers “could be anybody,” said an analyst at Creditsights Inc. “It could be an investor-owned utility. It could be a private-equity group.” A prospective buyer would need to assess how much capital would be required, negotiate with bondholders and have the ability to set rates without interference from the Commonwealth or what remains of the energy regulatory commission. “The debt and the bondholders are not going away,” the analyst said. Hedge funds, mutual funds and bond insurers have been negotiating with the utility for more than three years over how to restructure the debt. A previous settlement of 85 cents on the dollar agreed to by bondholders and the government was rejected by the Board. Puerto Rico administration finally yielding control of the electric utility should make way for better bondholder outcomes.

PREPA Ad Hoc Group Bondholders Want Consensus…“We believe the American citizens that live in Puerto Rico would be better served by an electric utility run by a private operator with a proven track record, subject to existing PREC oversight and free from government interference.” “The Ad Hoc group of bondholders which includes bond insurers believe the only path for any proposal to deliver low cost and reliable power will be if PREPA respects property rights, since failure to do so will result in years of litigation from multiple deep pocket bondholders. The sole way to achieve this is to break the pattern of continued disregard for the law and past obligations and reach a consensus resolution with bondholders and other creditors.” Many analysts believe the Puerto Rico Government and Oversight Board realize it would not be feasible for Puerto Rico to sell PREPA’s assets without the “priority lien on net revenues”, currently held by bondholders and bond insurers, following those assets. These analysts also believe that before a sale could occur bondholders would have to agree to a consensual settlement in order for PREPA to exit PROMESA Title III debt restructuring. In addition the Court would have to approve the PREPA transaction which should defuse any attempt by the Puerto Rico Government or Oversight Board to ignore bondholders rights.

Lower Energy Cost Could Bring Change…“The transformation that I present to you today will allow us to overcome the challenges that energy generation is having worldwide. We are taking a step towards a consumer-centered model, where you can have options. An innovative model that is sustainable, with advanced technology, and resilient before the ravages of nature. It should be financially viable, at a lower cost to you. This will be the leap towards the modernization of Puerto Rico,” Governor Rosselló stated. Lower cost energy has broad positive implications for the Island’s future prospects.

THESE POINTS OF INTEREST REFLECT THE AFFECT OF THE SEPTEMBER

HURRICANES MAY BE FAR LESS THAN THE GOVERNMENT ADVERTISES:

General Fund… Collections down only 3% or $91.5 million below projections. The declines came
after hurricanes hit on September 10, 2017.
November Trade Statistics… Puerto Rico: Exports $3.89 billion – Imports $3.41 billion.
Trade Balance + $476 million (excess) which is low for Puerto Rico, excess is usually higher
U.S.A…Exports $200 billion – Imports $251 billion – Trade Balance -$50 billion (deficit)  
Consumer Prices... Prices rose 1.2% year-over-year in November 2017.
Car Sales…Year-over-year car sales dropped 2.3% in 2017.
Unemployment… Monthly unemployment rate, 12/31/17 10.90% compared to 12.40% 12/31/16.
FEMA Puts Hold on Loans… Puerto Rico may have too much cash to get a loan. After recently discovering $6.9 billion in undisclosed bank accounts FEMA wants to investigate the Island’s cash position.
Puerto Rico Bonds… Albeit trading at depressed prices, most Puerto Rico bond prices have increased in 2018, COFINA Bonds closed in December 2017 at 9.75, traded on January 23 at 15, up over 50%.

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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