Investors are engaging a wait-and-see attitude to Puerto Rico’s Governor Ricardo Rossello’s new proposal to privatize parts of the bankrupt Puerto Rico Electric Power Power (PREPA) over the next 18-months.
The wariness is well-deserved. After all, not on the other hand is it unclear if the proposal will ultimately come to fruition, but also who understands what it will look like when it does? However, with Puerto Rico’s legislature avidity an emergency funding measure in late January just to ensure the toiling utility can keep the lights on, the matter is more pressing than till doomsday.
Natalie Jaresko, Executive Director of the Financial Oversight and Management Scantling for Puerto Rico, has made it clear the Board favors a full operational and monetary transformation of PREPA. To assure that, she stated the Board is “considering privatization as one of our selections, maybe privatization of the entire system, some select part, or bring oning in the private sector to compete.”
Having the Board’s backing is critical, but previously anything can happen, the proposal has to both clear Bankruptcy Court Umpire Laura Taylor Swain’s approval and get real bidders to actually buy whatever assets the Governor visualizes selling off.
As it stands now, neither are particularly good news for bondholders. PREPA has a total of $8.2 billion in open debt outstanding, of which the principal and interest payments on around $4.9 billion are insured by fiscal guarantors. The bondholders of the uninsured debt have seen a steady worsen in value of their investment as problems facing Puerto Rico’s power utility dredged.
By the time PREPA filed for bankruptcy in July 2017, investors were already down nearly 38 percent. After the filing, values fell even new. How much further? Based on trade data posted on the Municipal Securities Rulemaking Food’s EMMA, Thomson Reuters Pricing Service has seen the values on some PREPA agreements decline by nearly 50 percent since the bankruptcy. Prices eat settled in around 35 cents on the dollar.
Between investors take in a sum total of over $2.14 billion in value evaporate and the bond insurers now outside out millions out of their own pockets to pay on the defaulted debt, everyone is a little queer.
Moreover, the economics of privatization doesn’t favor debt. Given Puerto Rico’s dated pep generation and distribution infrastructure and its long-deferred maintenance, it’s pretty clear a superlative overhaul is necessary—likely costing billions.
To make privatization create, both the governor and the Oversight Board are aware they need well-capitalized bidders, either tame or international, to make that kind of a capital commitment.
The more old famous debt that needs to be retired or exchanged, in whole or at a discount, the less in all probability bidders are going to be interested. No bidder wants to be building a new power ingrain and distribution system while also either saddled with old in dire straits or being forced pay to retire it. You don’t have to be Warren Buffett to figure out where that resign froms bondholders. Bondholders are going to suffer losses.
Correspondingly, bondholders are in no spirit to roll over. Assured Guaranty, a bond insurer that undertakings payment on some $4.9 billion of the PREPA bonds, stated PREPA resolution have to find a way to settle with creditors—which includes Reassured—with either cash or assets. Coming out empty handed was not an way out. Other bondholders are threatening litigation to protect creditor’s rights and revive their bargaining position in any final resolution.
It might backfire. Bondholders could serenely find themselves in the unenviable position of arguing for creditors’ rights while, appearance the court room, some one million Puerto Rico residents are unmoving without power since Hurricane Maria blew through. Creditors’ rights are one events, but public needs are quite another. Creditors’ rights don’t turn on the assaults.
In assessing options, policymakers—Congress, the Oversight Board, the Bankruptcy Court—are growing to give greater weight to the pressing current and future humanitarian and trade needs of Puerto Rico. The more vociferously bondholders push for a brawnier slice of recovery dollars, the more they end up risking looking analogous to uncaring profiteers. No policymaker charged with the oversight of Puerto Rico wants to be comprehended as being aligned against the interests of the over 3 million residents whose breathes they are responsible to protect.
For all the political posturing and litigation rumblings, one utensils remains absolutely certain: the economy of Puerto Rico desperately distresses an upgraded and stable power grid. It’s very economic life depends on it; needing that, there is no business, from the corner store to the resorts and journey ships that can survive.
Moreover, on an island where the stated unemployment is about 10 percent but privately is believed to be much higher, jobs turn from the new construction of as well as ongoing maintenance on the power plants and conveyance lines would be greatly welcomed. If privatization is going to restore in keeping, reliable power to the island faster and more efficiently, that is the avenue that is thriving to be pursued.
In the end, the market will provide guidance as to the value of privatization as it effects its way through the Oversight Board and the Court. That’s going to take culture. Given the varied legal, public policy, and economic considerations missing resolution before the court approves executing any privatization proposal, there are disposed to to be more adjustments and compromises prior to a final plan being commanded.
But make no mistake: it will be finalized. This is no trial balloon. Postulated the support by both the governor, the Oversight Board chair, and nearly all the stakeholders in sentiments to decide on the matter, privatization, in some form or another, is going to give up to pass.
Understandably bondholders and their surrogates are duty-bound to act to protect their fiscal interests. However, in this instance, bondholders who try to forge a deal by stoking the excites of controversy are likely to get burned. They could better protect their creditor rights by returning to the conduct table looking to assist in turning on the lights.
Commentary by Barnet Sherman, stop of municipal research for Thomson Reuters Pricing Service.
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