The Examiners: Prepa Must Confront ‘Tarnished’ Public Image

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?

While Prepa has committed to addressing its operational and liquidity challenges and long-term debt, significant uncertainty exists as to which legal regime will govern any long-term restructuring. This uncertainty makes it difficult to determine which factors (and constituencies) will prevail in Prepa’s restructuring.

Prepa’s forbearance agreement with certain of its banks and bondholders will be ineffective if Prepa seeks to reorganize under the Puerto Rico Public Corporations Debt Enforcement and Recovery Act, the recent legislation that allows a Puerto Rico public corporation to restructure with either supermajority creditor consensus or court oversight. Further, certain bondholders have commenced lawsuits challenging the constitutionality of the Recovery Act, making it uncertain that even if Prepa were prepared to restructure without the benefits of lender forbearance that the Recovery Act would remain a tool that Prepa can wield to restructure its debt.

Additionally, there has been a proposal in the U.S. Congress to change federal bankruptcy law to allow Puerto Rico public corporations to seek protection under Chapter 9 of the Bankruptcy Code. It is unlikely that sufficient progress on this issue will be achieved in this Congress, however, given Prepa’s deadline to design and adopt a credible restructuring proposal.

Therefore, Prepa is left with the choices of: (a) attempting to restructure consensually through contractual arrangements or (b) using the disputed tools of the Recovery Act, without the support of major banks and bondholders (assuming the Recovery Act survives pending litigation).

Regardless of the legal path that Prepa chooses—or is forced—to follow to implement its long-term restructuring, several objectives should be on Prepa’s list after it addresses immediate liquidity needs.

First, Prepa must consider how to best position itself for future viability, including obtaining the necessary capital to move to more secure, less expensive and more stable forms of power generation. (Prepa currently generates nearly 70% of its power from expensive oil.)

Second, Prepa must study and understand the expected impact, positive or negative, that its restructuring will have on Puerto Rico’s broader economy. (Energy costs are reportedly single most prevalent issue for economic contraction over the past years.) Positive outcomes should emerge from Prepa tackling its debt and its antiquated-inefficient operations—if the restructuring allows Prepa to generate power from cheaper and cleaner fuel sources, more stable and competitive markets/fuel suppliers, and more modern and efficient generating facilities. On the other hand, a Prepa restructuring that seeks significant lender concessions will undoubtedly have a downstream impact on other Puerto Rico bond issuers as they source capital in the future and, in some cases, attempt to restructure their own obligations.

Third, Prepa should use the restructuring as an opportunity to address how the corporation is perceived in its community. Prepa is currently dogged by allegations of overbilling customers to assertions of broken operations and a fundamental inability to collect on its bills. For Prepa to become a reliable utility for consumers, a service provider that the government can unequivocally support, and an ongoing viable concern for lenders to invest in, Prepa will have to take concrete, credible and immediate steps to restructure addressing the root causes of its less-than-competitive services and tarnished public image.

Shaunna D. Jones is a partner at Willkie Farr & Gallagher’s business reorganization and restructuring practice. She is based in New York.