Estimating muniland bond recoveries

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.

Puerto Rico

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.

Puerto Rico’s whirling inferno of news

The news flow from Puerto Rico has become a whirling inferno since the government passed legislation last week to allow some of the Commonwealth’s public corporations to default.

Here are four important points for investors in Puerto Rico bonds:

1. The market is awaiting official confirmation that Puerto Rico’s teetering electric utility PREPA has made its $204 million bond payment due July 1. If made, it will relieve short-term pressure on Puerto Rico, but the intentions for restructuring are still unknown. Attention will turn to PREPA’s $660 million outstanding lines of credit with Citibank and Scotiabank that need to be renewed.

2. The credit rating agencies are finally catching up with the market and have been raining downgrades and watch alerts on Puerto Rico and its public corporations. At this point these downgrades are somewhat irrelevant, since Puerto Rico bonds are selling at junk yields and investors are more interested in possible recovery values.

Puerto Rico’s electricity monopoly is in a downward spiral

Puerto Rico’s faltering electricity monopoly PREPA received another blow this week when Standard & Poor’s downgraded the public corporation’s $8.8 billion of revenue debt to BBB- (5.5) from BBB (6) and placed the rating on CreditWatch with negative implications. This leaves PREPA one small step from junk grade in the three major raters.



Quality Fitch BB

– 4.5 – Moody’s Ba2

– 4.5 – Standard & Poor’s BBB-

– 5.5 –

In August 2013, PREPA issued $673 million of Power Revenue bonds, which recently traded with a 10 percent yield for maturities due 07/01/2040 (Cusip 74526QA85 shown below). This clearly signals that the market believes these bonds are speculative grade. Standard & Poor’s low investment grade rating of BBB- is lagging the market’s view and is two notches higher than the other major raters.


PREPA’s severe cash problems first surfaced when it was reported that the electricity monopoly had transferred $100 million from a capital construction fund to pay Venezuela’s state-run company Petrobras for oil to run its electricity generators. Caribbean Business reported:

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