The Examiners: Prepa Restructuring Features Usual, Unusual Challenges

Puerto Rico’s Prepa utility has until mid-December to come up with a new business plan and early March to propose a debt-restructuring plan. What should these plans consider?

The turnaround plan for Puerto Rico Electric Power Authority, or Prepa, will have to address many unique circumstances not present in more traditional aspects of a turnaround or restructuring, as well as those which are more universal.

Prepa’s unique circumstances include:

• Prepa is a public corporation owned by the Commonwealth of Puerto Rico;
  
  
  
  • Prepa’s ability to reduce government-mandated subsidies and collect receivables from other governmental entities may be difficult or impossible;
  
  
  • A sale of Prepa is most likely not a politically acceptable alternative.
  
  
  • 58% of Prepa’s revenues must be spent for fuel and the price of fuel is not controllable by Prepa;
  
  
  • Prepa is presently not an eligible debtor under any chapter of the U.S. Bankruptcy Code (including Chapter 9; however there is a bill pending on Congress, H.R. 5305, which would allow Prepa and other similar Puerto Rican municipal corporations to file for protection under Chapter 9);
  
  
  • Bondholders are challenging the constitutionality of Puerto Rico’s Public Debt Recovery and Enforcement Act, which was enacted in June 2014 to enable Prepa’s restructuring in a process similar to Chapter 9;
  
  
  • Consideration must be given to the potential impact of any restructuring on the municipal bond market for Puerto Rico’s (and its political subdivisions) current and future security issuances.
  
  
  
  

Among the “more usual” challenges facing Prepa are:

• The disparity between the estimated value of Prepa’s $6 billion in assets and its approximately $10 billion in liabilities will probably require a restructuring of its indebtedness;


• The need for operational and financial improvements include plans for:
  
  
  
  • Revenue improvement (which may be impacted by Prepa’s current extremely high utility costs);
  
  
  • Cost reduction;
  
  
  • Improved liquidity and cash management (accounts receivable management and capital expenditures);
  
  
  • The possibility of renegotiating union contracts;
  
  
  • The difficulty of complying with the Dec. 15, 2014, deadline for a business plan and the March 15, 2015, expiration of the debt maturity extension required by its credit extension agreement with its bondholders.
  
  
  
  

Clearly, Pepa’s turnaround and restructuring efforts are markedly different from all other municipal and corporate turnarounds and restructurings that we have ever seen, and it will be extremely interesting to watch the process as it develops.

Ralph S. Tuliano is chief executive of financial advisory firm Mesirow Financial Consulting LLC and a member of the American Bankruptcy Institute’s board of directors.

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