Puerto Rico's PREPA bondholders propose $8 billion restructuring: outline

NEW YORK (Reuters) - A new offer by bondholders of Puerto Rico's public utility PREPA to refinance billions of dollars in debt was criticized by the utility on Thursday and deemed risky by others.

Presented to PREPA on July 7 and made public on Thursday, the bondholders' plan would split about $8 billion of debt into two tranches, with one taking the form of capital appreciation bonds (CABs), under which payments are deferred for many years until a large balloon payment is due at once.

PREPA on Thursday said the plan was "unachievable," and "does not provide a path for successful restructuring.”

Bond insurers, who would be on the hook if PREPA defaults, also opposed the plan. Blackstone Group's Tim Coleman, a financial adviser to National Public Finance Guarantee, said it "disproportionately impacts bond insurers' interests."

The proposal is the latest salvo in ongoing restructuring talks between the power utility and its creditors, and counters a June proposal from PREPA that the creditors roundly rejected.

The plan was penned by a group representing 40 percent of PREPA's bondholders composed of investors like Franklin Advisers and BlueMountain Capital. Bondholders own $8 billion of PREPA's total $9 billion debt load.

"Compared to PREPA's most recent proposal, this framework provides better financial terms for PREPA across the board – including lower interest rates, lower debt outstanding, and a longer and more flexible debt maturity profile," said Stephen Spencer, Managing Director, Houlihan Lokey and adviser to the PREPA bondholder group.

The group said the plan would save PREPA $2.5 billion in financing costs through 2025. It would create two tranches of debt with reduced interest rates of 4.1 percent, down from about 5.2 percent, and an anticipated AAA rating.

The first tranche, with about $5.7 billion of the debt, includes debt service relief until 2019. Payments on the second, CAB tranche, holding the remaining $2.4 billion, could be delayed until 2035.

"CABs tend not to be great deals for issuers," said Nicholas Venditti, portfolio manager at Thornburg Investment Management, which does not hold Puerto Rican debt. "Twenty years from now you have a huge liability all at once. PREPA was absolutely right to completely disregard the plan."

PREPA did not address the CAB element directly, but said the plan “poses disproportionate risks on ratepayers" and "does not share the burden."

Analyst Daniel Hanson, of Height Securities, said he doesn't expect PREPA to go for a CAB structure, but can see why bondholders proposed it.

"Their hope is, it would be a short-term solution that, once PREPA restructures, would be easy to refinance," Hanson said.

Several series of PREPA bonds rose in light trading following the bondholder proposal.

FAR FROM CONSENSUS

Plagued by outdated equipment and an inability to collect its bills, PREPA, Puerto Rico's largest public corporation, is seen as a microcosm of the mismanagement and economic stagnation that has landed Puerto Rico into a $72 billion debt hole.

Under a forbearance agreement with creditors that protects PREPA from lawsuits until Sept. 15 while sides negotiate, PREPA has until Sept. 1 to execute a restructuring agreement.

The bondholders will take their proposal off the table if not agreed to by then, said a person familiar with the matter.

Coleman said the proposal "was developed without consultation with the bond insurers," but that NPFG is "in favor of a well-structured market-based securitization, and are prepared to work with PREPA."

Shares of insurers of the bonds rose sharply. MBIA , owner of NPFG, surged 14 percent on Thursday while Assured Guaranty rose nearly 4 percent. Broker BTIG upgraded MBIA to 'buy' from 'neutral', citing details emerging from the PREPA negotiations that point to a less draconian outcome than the one indicated by its bond price.

A second source familiar with the restructuring talks said the effective do-or-die date to restructure may be Dec. 15, when the utility must repay a roughly $130 million loan to its bond insurers. On Jan. 1, PREPA will owe bondholders another interest payment.

PREPA's plan, revealed by the utility in a separate filing late on Wednesday, had called for uninsured bondholders to exchange their bonds for "turbo bonds" with no principal payments for the first five years.

Though debt service appears to be the key sticking point, modernization is also a contested issue. PREPA's plan would oppose privatizing the utility, while the bondholders' plan would give PREPA the option to contract to buy power from a third party, which would build and operate a new plant in the Aguirre region.

(Story refiles to remove extraneous words in quote in paragraph 7 "lower debt outstanding")

(Reporting by Nick Brown and Megan Davies, additional reporting by Robin Respaut; Editing by Edmund Klamann, Meredith Mazzilli and Bernard Orr)