Puerto Rico’s PREPA Makes Deal For 15% Haircut On Bonds

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Financially beleaguered Puerto Rico’s Electric Power Authority (PREPA) announced on Wednesday that they had reached an agreement with nearly all bondholders on a restructuring plan that calls for a 15% loss to be passed on to investors. The 15% loss figure is significantly less than the 30 to 40% losses some analysts had suggested investors could suffer.

Of interest, shares of PREPA-exposed bond insurer Assured Guaranty were up almost 4% at $25.76 at noon on the NYSE, while the share price of fellow exposed bond insurer MBIA leaped 11.9% to $7.57.

More on Puerto Rico’s Electric Power Authority deal with bondholders

The Puerto Rico Electric Power Authority has been working with creditors for more than a year to restructure its crushing $8.3 billion debt and upgrade its facilities. It was reported late Tuesday that group representing close to 35% of PREPA’s debt agreed Tuesday to take a loss of 15% and reduce principal and interest payments by over $700 million over the next five years.

As Mark Palmer, an analyst at BTIG LLC, pointed out in a flash research note: Getting back 85 cents on the dollar “would represent a significantly less painful outcome for the insurers on their exposure to Prepa’s debt than had been projected by many observers.”

Tuesday’s announcement is particularly good news given Moody’s Investors Service had projected that investors would only get back 65% to 80% of their investment.

According to recent regulatory filings, MBIA’s National Public Finance Guarantee Corp. had nearly $2.1 billion in  debt service exposure to PREPA as of June 30th. Other documents show that Assured Guaranty’s holding firms are responsible for $1.2 billion of debt-service payments connected to the agency.

The statement from PREPA noted that Assured consented to extend a forbearance agreement until September 18 to keep negotiations out of court. MBIA, however, was the only creditor to decide to not renew the forbearance contract. MBIA has not commented on why it refused to extend the forbearance.

How the system works is municipal-bond insurers are paid premiums by investors to make sure they receive full principal and interest payments on time. The deal reached earlier this week will see the bondholders convert their securities into new debt to be repaid from a surcharge on PREPA customers.

Uninsured bondholders will receive debt that pays interest at a rate of 4% to 4.75% or convertible capital appreciation bonds with higher interest rates.

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