A lot of people in muniland have asked me how much the bonds of Puerto Rico’s electric monopoly Prepa will recover if they are restructured. I’ve thrown out a few numbers, but I don’t have an analytical tool to do a proper cash flow analysis. Chris Foster, managing director of New Oak, has published an open source model (download middle right of page – XLSM file) that allows one to adjust various inputs like fuel prices and electric rates to estimate the level of debt service that Prepa can support.
New Oak put most of Prepa’s historical financial data into the spreadsheet and creates scenarios that can be adjusted to estimate how much bondholders will have to be cut.
Foster explained that his firm, a subadvisor to funds and financial institutions, was hearing a lot of uninformed theories about Prepa. He thought modeling the potential outcomes would be helpful. His firm and their clients do not own Prepa bonds. Foster said that it was time for everyone involved “to look at the math.”
Foster says statements like Puerto Rico Governor Alejandro García Padilla’s that he wanted to sue raters were made to give local residents a target for their anger, but bondholders should ignore the rhetoric. He welcomes feedback from market participants about his open source model. Foster also told me that municipal analysts should start doing more fundamental credit analysis like distressed debt analysts.
I talked to Shawn O’Leary, Nuveen Asset Management senior vice president, about Foster’s model. He believes the concept is a great idea, but O’Leary doesn’t think that a Prepa restructuring would be about cash flows. Instead, it would be about protecting the liquidity of the Government Development Bank (GDB), which has been operating as the government cash slush for years.