A Look at PREPA’s Privatization Saga

July 2, 2018

In my 30 years in the municipal business it is disheartening to think the Puerto Rico Electric Power Authority saga ends like this. Holders of PREPA bonds could be in for a shock.

While spending the last 20 years as a buy-side analyst covering utilities, I always associated privatizations and concessions as out-sized positive return events for my shareholders. They happen when bonds of the entity being privatized get taken out at huge premiums to their current market value. Unfortunately, this is not the case with the PREPA, though that should not be a shock to anyone.

Having covered PREPA for 12 years, I learned to reset my expectations with every overdue financial audit and investor conference that they held. This is not to say that there were not times when I thought that they started to turn it around, but they were short-lived. At a certain point in my analysis, I realized that it wasn’t possible to separate PREPA from the rest of the island’s credits.

Today, armed with only limited firsthand knowledge of the restructuring proceeding and limited real information about PREPA’s financial condition, I’m not going to guess at the real Enterprise Value of PREPA. I know current bondholders and creditors are trying to cobble together the real value of the entity and for their bond positions. In my quick analysis, the value of the transmission and distribution systems should be the easiest to figure out, given they were both just completely replaced after last year’s hurricanes. But my question is: Will bondholders see any of the money from the concession agreement?

Only PREPA’s well-used and poorly maintained generation assets are left to pay off the debt. Plus, Governor Rosselló also mentioned he wanted to fill some of PREPA’s pension hole with proceeds of the sale. In my opinion, this doesn’t leave much left for bondholders. Given the current state of their generation fleet, I can’t image that there will be huge demand for it. Even if there is, the new owner of the generation assets will still be exposed to PREPA for payment for the electricity. That is unless they set up a lock box for revenue to pay expenses before they get distributed to the Commonwealth. Experience tells me that this could be tough to accomplish on the island.

I’m could be totally wrong about the valuation of their assets and for everyone involved, I hope I am, but I know it doesn’t look good. I know the fight isn’t over. For evidence I point you to a survey at this year’s NFMA Conference: About 73% of the respondents believed it would take more than three years (54% thought five years or longer) to resolve the island’s issues and be able to return to the market. While their timeline might be right, it doesn’t make it easier right now.

Buy-Side Investor

BondLink Perspective - Former Muni Buy-Side Investor