The Examiners: Public Scrutiny Makes Prepa Restructuring Unique

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 success of any turnaround plan will depend on its ability to achieve two equally important objectives: to restore fiscal stability and to position the business for long-term prosperity. Some of the tough decisions required may cause some short-term discomfort and won’t be popular, but by being transparent and articulating a clear vision forward, all of the various constituents can begin to unify around a common goal.

Few restructurings ever receive such close public scrutiny as those involving a public entity. For the professionals taking on Prepa, the added attention will bring some unique dynamics. On one hand, the wide range of constituents representing diverse interests and political perspectives could make negotiations more difficult. But since failure would likely have unsettlingly broad implications for the Puerto Rican economy, there may be added motivation for such a diverse group of stakeholders to come together to quite literally keep the island’s lights on.

Initial actions taken to remedy the situation will no doubt be painful. But correcting cost structures and tightly managing working capital, which will entail direct engagement with lenders as well as management, are critical to stabilizing the business. The real work, however, will pertain to identifying and implementing long-lasting operational improvements that, if successful, can lead to a financially viable future. The list of factors that contributed to a financial predicament of this magnitude will be invariably long. It will be important to identify the three or four trigger issues most likely to yield meaningful results in the short term. Righting the ship will require a resolute focus on these few initiatives and serve as the anchors for the turnaround.

Once a plan is developed, it will be necessary to clearly communicate a path forward to the various constituencies. Their understanding and support will be key to winning concessions and inspiring optimism. Particularly in this situation, strong leadership will be critical to long-term success.

It is important to remember that there is no singular reason for Prepa’s crisis. These situations generally arise after numerous poor decisions have compounded over time until they reach critical mass. Similarly, long-term financial security won’t arrive overnight. But as any distressed investor will attest, the most difficult turnarounds can be the most motivating and rewarding.

Marc Leder, co-chief executive officer of Sun Capital Partners Inc. of Boca Raton, Fla., has been engaged in leveraged buyouts, investment banking, and business operations for more than 25 years.