March 21, 2017 / 8:01 PM / 5 months ago

Puerto Rico offers new PREPA debt restructuring, bond insurers suffer

The power station Central San Juan of Puerto Rico Electric Power Authority (PREPA) is seen in San Juan, Puerto Rico, June 30, 2015. Reuters/Alvin Baez-Hernandez

NEW YORK (Reuters) - Puerto Rico Electric Power Authority, the island's ailing power utility, on Tuesday reopened a long-agreed debt restructuring deal that drew ire from bondholders and put the stock of credit insurers under further selling pressure.

The new restructuring proposal alters the 15 percent reduction in creditor principal, removes the requirement for an investment grade credit rating on restructured debt and decreases the size of a reserve fund put in place to insure payments are made on the bonds.

"That (investment grade) was never a realistic ask. I would love to say that we would have investment grade bonds, but it is just not true," Elias Sanchez, an official in Governor Ricardo Rossello's office, told Reuters on Tuesday.

Puerto Rico has struggled to pull itself out of a financial death spiral for several years, burdened by unsustainable debt, a 45 percent poverty rate and citizens leaving for the mainland.

In 2015, PREPA hammered out a restructuring deal with creditors that was seen as a potential roadmap for a broader restructuring of the U.S. commonwealth's crippling $70 billion debt load. PREPA alone has more than $8 billion in debt to restructure.

The new proposal comes a day before a U.S. congressional hearing on the PREPA restructuring plan. Rossello is scheduled to testify as are the chairman of the federally appointed Financial Oversight and Management Board created under the PROMESA law last June, the chairman of PREPA and a representative of major creditors.

Under the new deal 80 percent of the original debt would move into securitization bonds backed by a dedicated charge on customer bills. This essentially keeps the debt ringfenced from PREPA's operations.

In addition, creditors will receive 5 percent of their original investment in the form of a new bond backed by PREPA. That brings them to their 15 percent cut in principal.

One group of PREPA creditors said the new proposal fundamentally changes the terms of the original deal.

"The modifications would undermine the value and structural integrity of the new PREPA securitization debt," the group said in a statement on Tuesday.

BROADER FALLOUT

PREPA'S original deal served as a bellwether. Its potential unraveling dovetails with the acceptance of a revised island-wide financial restructuring plan by the oversight board that sets aside less money for paying out debt.

Under the newly certified plan, debt service would be $800 million per year versus $1.2 billion a year over a 10-year period. That puts the recovery rate for bondholders, in aggregate, around 30 cents on the dollar, according to analysts.

Benchmark Puerto Rico general obligation (GO) debt has suffered in the wake of the decision. GO bonds maturing in 2035 and carrying an 8 percent coupon, traded at 61.575 on Tuesday, down from Monday's closing price of 63.3, according to Thomson Reuters data..

The bond is down 11.175 points in price since the plan was certified on March 13 and hit an all-time low on Monday at 61.35 before rising. Defaulted debt trades more like an equity and is not typically quoted with a yield.

The debt has been in default since last year when U.S. Congress passed the PROMESA rescue law that suspended debt payments.

Compounding the negative sentiment is a brewing civil war between various camps of Puerto Rico's creditors.

On Sunday, so-called COFINA bondholders, whose debt is backed by sales tax revenue, asked a federal judge in San Juan to deny the GO bondholder group's effort to stop the island's government from making payments on COFINA debt.

    Late Monday, a federal appeals court in Boston ordered that lawsuit frozen under PROMESA, which bars litigation over Puerto Rico debt defaults until May 1, to give the island and creditors time to work out a consensual restructuring without worry about lawsuits.

GO debt traditionally is considered senior to all other debt obligations as it is backed by the good faith and credit of a municipality, but COFINA creditors have argued that the tax revenue stream guaranteeing their debt is off limits to the government.

Bond insurers involved in Puerto Rico have seen their stock prices hammered by the uncertainty created by the lower debt service, growing legal rancor between creditor groups and now the reopening of the PREPA restructuring. The last element is particularly hard on Assured Guaranty Ltd and MBIA Inc which have exposure to PREPA.

On Tuesday afternoon, Assured's stock was down 1.9 percent at $37.05 and MBIA shares were down 1.8 percent at $8.28. Since March 13, Assured shares are down nearly 9 percent while MBIA's are off more than 12 percent.

"All of these names had been performing well since PROMESA because there was an expectation of what would come from the deal," said Mark Palmer, financial equity analyst at BTIG in New York.

"Now with the PREPA deal being renegotiated ... there is a question about whether a higher level of losses for the insurers is going to occur. If it does occur, a lot of the pain is now baked in to the share price," he said.

Editing by Matthew Lewis

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