The Puerto Rico Electric Power Authority on Monday signed a nearly $10 million contract with turnaround boss Lisa J. Donahue.
Donahue, a New York-based managing director at AlixPartners and global leader of the firm’s turnaround and restructuring practice, was tapped by Prepa to serve as chief restructuring officer as part of forbearance deals with the government utility’s bondolders and bankers.
The $9.7 million pact runs through April 15 and will cover pay for Donahue and her team.
“We are pleased to have wrapped up the contract process,” Prepa Board Chairman Harry Rodríguez said. “The hiring of Donahue and her team of restructuring experts represents an investment in the future of our public corporation.”
The contract calls for Donahue and her staff of 10 restructuring experts to receive a maximum of $8.995 million for full-time work through the life of the contract on April 15. It allows for a maximum of 8 percent in spending reimbursements for total cap of $9.7 million.
Consultants from FTI Consulting will work alongside the team from AlixPartners. AlixPartners will be responsible for logging the work of its staffers, which will be reviewed and approved by Prepa on a monthly basis.
Donahue, who began work as Prepa’s CRO last week, will move quickly to increase financial transparency and stabilize cash fl ow at the troubled utility, and should wrap up the bulk of her work over the next six months, CARIBBEAN BUSINESS sources said.
Donahue has made clear in previous restructurings that she believes 180 days is enough time for any entity to restructure itself, and many sources are betting that under Donahue a restructuring plan will be in place by year’s end.
The new Prepa CRO has made increasing revenue a priority in previous assignments, but she may not have the same freedom at Prepa to raise rates given the sky-high cost of electricity and the explosive political environment surrounding the issue, according to sources.
Regardless, the newly formed Puerto Rico Energy Commission will begin a rate review in November, and eliminating subsidies and expediting payments from government entities can both help increase revenue as well.
“Her immediate priority will be to get a handle on basic finances, and determine exactly where the money comes from and exactly where it is going,” said one distressed debt investor who has worked with Donahue in the past.
“If there is a hidden set of books or other problems, she will be able to identify that very quickly,” added the investor.
With increased transparency at Prepa, by next month bondholders will know a lot more about how the business of Prepa is run. While Donahue will make clear that she works for Prepa, she will also keep bondholders better apprised of the utility’s financials than they have ever been before.
Finances are her strong suit, but Donahue has less experience with the technical challenges that are rife at Prepa’s antiquated power system, along with a combative union, heated political environment and entrenched government bureaucracy at the public corporation, said Daniel Hanson, an analyst at Height Securities.
He noted that she has also battled with Environmental Protection Agency officials and other regulators during previous restructurings, which were also marked by poor investment in capital infrastructure.
“Bondholders got who they wanted, but it may not be who they need,” Hanson said. “She will be deferential to the entrenched interests at Prepa and act more as a referee than a real reformer.”
Donahue’s ability to “wrangle the considerable competing interests in the utility into agreement over any kind of restructuring plan” will be limited, and the restructuring process will be driven by negotiations among Prepa management, union leaders and bondholders, the analyst added.
Joan Vidra, managing director at Opportunities Emerging & Frontier Markets Advisory, said she is “more optimistic than not” and believes Donahue will try to “shake things up” but take a “balanced approach” in fashioning Prepa’s turnaround plan.
“Everybody is going to have to take a hit,” Vidra said, referring to bondholders, creditors, Prepa employees and other interests. “The most important takeaway is they hired an experienced outside person who can take an objective look at the operations. Making Prepa a viable concern will be central to her agenda,” Vidra added.
Before taking office on Sept. 8, Donahue said it was too early to discuss the potential for job cuts, price hikes, privatization or write-downs of Prepa debt, but said nothing was off the table.
“We have an opportunity here to really transform Prepa for the benefit of all the people of Puerto Rico and the creditors,” Donahue told Reuters. “We will be in discussions with all our constituents in trying to put together a fair plan, a plan that makes sense for all.”
While generally optimistic that the restructuring plan was moving forward, analysts and other sources across the board said the success of the plan will depend on the authority granted Donahue and her ability to make changes that political considerations and opposition by Prepa management and unions have made impossible.
That’s especially the case, as Gov. Alejandro García Padilla has discarded privatization, rate hikes and employee firings, and said all decisions made by Donahue would have to be approved by the Prepa board.
In one sense, Donahue’s presence could serve a purpose by providing political cover to the administration if forced to take such unpopular decisions, which analysts say are necessary to save Prepa. However, her decisions will have to be executed in order for a restructuring deal to hold up and Prepa’s financial problems to be fixed.
“There is a tension here that at some point is going to be a train wreck unless the government turns around on some of these issues,” one source said.
Fitch keeps Prepa on ‘negative’ watch, says debt restructuring still probable
By CB Online Staff
Fitch Ratings is maintaining its Rating Watch Negative on $8.7 billion of junk-rated Puerto Rico Electric Power Authority (Prepa) power revenue bonds. The bonds are rated CC.
Fitch said maintenance of the current Rating Watch Negative reflects its view that a restructuring of Prepa’s debt obligations remains probable despite recent forbearance agreements between the government utility and certain of its creditors (including bondholders). The agreements, signed on Aug. 14 2014, provide only temporary relief related to the scheduled maturity of Prepa’s bank lines of credit, and minimal comfort that long-term financial compliance is sustainable, according to Fitch.
Pursuant to the forbearance agreements Prepa’s principal creditors have agreed not to exercise any rights or remedies under their respective agreements through March 31, 2015, which allows for continued operations and time for additional negotiations. The maturity dates on Prepa’s existing $696 million of bank loans have also been extended to March 31, 2015 (from Aug. 14, 2014).
“Although certain provisions of the agreements appear designed to enhance Prepa’s ability to meet near-term operating expenses, other provisions including the required submission of a restructuring plan by March 2, 2015, retention of a chief restructuring officer and the contemplated use of reserve funds for debt service payments support Fitch’s view that a financial restructuring remains probable,” Fitch said.
The terms of the forbearance agreements allow for bondholders to be paid scheduled debt service, including payments due Jan. 1, 2015. However, Fitch remains concerned that Prepa’s net cash receipts and existing funds on hand are insufficient to meet longer term working capital, debt service and other funding requirements.
For the 12 months ended June 30, 2014 Prepa reported unaudited earnings before interest and depreciation of $781 million and a net loss of $267 million. The net loss was well above Prepa’s budgeted loss of $161 million. Poor performance for the fiscal year was further characterized by declining energy sales (3.6 percent in fiscal 2014), declining customers (1.5 percent), high concentrations of accounts receivable (25 percent of revenue), high fuel costs (14.99 cents/kWh) and an unwillingness to increase base electric rates.
Any restructuring that does not result in full and timely payment of the power revenue bonds according to the original terms promised, would likely result in a further downgrade to ‘C’ upon agreement and ‘D’ upon execution, according to Fitch.
Similarly, any request for relief through restructuring by Prepa, or GDB upon the governor’s request, as contemplated in the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the Recovery Act) would result in a further downgrade.
Fitch said any negotiated resolution to the financial challenges and liquidity demands facing Prepa that does not impair bondholders would be evaluated for commercial reasonableness and long-term sustainability, and could lead to consideration of a stable outlook and/or higher rating.
Fitch expects to resolve the current Rating Watch Negative following review of Prepa’s proposed restructuring plan. Fitch downgraded the rating on Prepa’s net revenue bonds to ‘CC’ from ‘BB’ on June 26, 2014 to reflect its view of a probable restructuring following introduction of the Recovery Act. Pursuant to the terms of the forbearance agreements, Prepa is now expected to submit to bondholders an updated business plan by December 15, 2014, and a restructuring plan by March 2, 2015. Prepa recently appointed a chief restructuring officer, consistent with terms of the agreements.
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