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Debt Restructuring

Oversight Board Rejects PREPA RSA, Approves Title III

 

Background

Puerto Rico's central government and several agencies are currently undergoing court- supervised restructuring, also known as Title III. The OB, as of July 3, has requested Title III proceeding after rejecting the amended RSA and further voluntary negotiations fell through.  

In December 2015, prior to the creation of the oversight board, PREPA negotiated a voluntary agreement with creditors. PREPA is currently responsible for approximately $9 billion of Puerto Rico’s $72 billion in debt. The proposed deal had creditors accepting an alleged 15% reduction in payment in exchange for higher-rated bonds backed by a higher charge on customer bills. However, newly elected Governor Ricardo Rosselló called for reopening talks under Title IV and altering the PREPA agreement of the prior administration in order to reduce the transfer of costs to consumers.

In January 2016, PREPA reached a Restructuring Support Agreement (RSA) with some of its creditors. However, talks to amend this agreement began with newly elected Governor Rosselló. On April 6, 2017, the government announced that PREPA and its creditors had reached a preliminary understanding regarding changes to the Restructuring Support Agreement. The oversight board seemed unable to reach a consensus over the agreement prior to the deadline. On Tuesday night hours before the deadline, following a 4-3 vote, the oversight board rejected the RSA. However, the board expressed interested in negotiating and submitted a new offer. However on June 30th, Governor Ricardo Rosselló petitioned the Board to request Title III for PREPA, which they did that same day.

Voluntary Agreements and Title III

Members of the oversight board presented a series of possible amendments to creditors in order to minimize the affect the debt would have on ratepayers. El Nuevo Dia reports that the board demanded that banks as well as uninsured bondholders face a 15% cut in debt, and the creation of a "turbo bond" aimed to pay the debt with creditors more quickly (30 years).[1] The proposal disclosed by the board sought to avoid the possibility of an overwhelming increase in electrical rates by imposing a limit on the transition charge that would be less than four cents, toward 2026.

The proposed PREPA RSA deal favored creditors and heavily burdened ratepayers. Puerto Ricans pay some of the highest electricity rates in the U.S. for an outdated and faulty system. The RSA added a monthly surcharge to the already high electricity rates in order to pay bondholders. This proposed agreement created unusually high electricity rates in order to ensure profit for hedge funds and insurance companies. Additionally, optimistic projections placed additional stress on the utility to produce new revenues, through higher rates, and will ultimately limit future investments needed to update its aging infrastructure.

Creditors lobbied Republicans in Congress, who then pressured the oversight board to approve the agreement. On June 15, Chairman of the House Committee on Natural Resources Representative Rob Bishop (R-Utah) wrote a letter to José B. Carrión III, the chairman of oversight board, urging the board certify and approve the RSA. However, a day later, Representatives Nydia M. Velázquez (D-NY) and Raúl M. Grijalva (D-AZ) urged Carrión to reject the restructuring. “Higher electricity costs are detrimental to the local economy, causing businesses both large and small to operate with reduced margins, leaving them less able to expand and hire new employees,” they wrote. The restructuring “will only accelerate the out-migration of residents and businesses.”[2]

A letter from the Board, dated June 28th, stated that the RSA would not be approved as it did not meet the standards established in Title VI of PROMESA. The Board indicated that the RSA did not establish adequate measures in order to achieve the $500 million needed to improve PREPA’s infrastructure and comply with environmental requirements. Another issue referenced by the OB was the RSA did not rectify the actuarial deficit in the pensions of PREPA, an estimated in $2,200 million.

On July 3 the Oversight Board formally petitioned before the Federal Court in Puerto Rico to begin restructuring the debt of the Puerto Rico Electric Power Authority under Title III of PROMESA. Title III of the PROMESA creates an orderly process for debt restructuring and will likely result in additional cut to the PREPA debts. However, this process can also expose PREPA to liquidation and privatization of assets, especially because PREPA needs an injection of capital in order to update its outdated system and to be able to comply with environmental requirements.

Privatization was brought up by OB members David Skeel, Ana Matosantos, Arthur J. González, and Andrew Biggs, in a comment published by The Wall Street Journal. These stated their belief that privatization was needed in order to attract much needed investments, improve infrastructure and reduce rates.  

Legal Actions

Two bond insurers, Assured Guaranty Ltd. and MBIA Inc.'s National Public Finance Guarantee Corp., sued the oversight board following their inaction toward the RSA. They are accusing the board of improperly withholding approval of the deal. The night prior to the RSA deadline, the bond insurers petitioned U.S. District Judge Laura Taylor Swain for a court order requiring the board to accept the RSA. They argued that it was necessary in order to comply with the PROMESA federal law regarding the renegotiation of the debt.


List of Sources

[1https://www.elnuevodia.com/english/english/nota/theboardreturnstothenego...

[2https://velazquez.house.gov/media-center/press-releases/velazquez-grijal...

 

Kathya Severino Pietri
Thursday, July 27, 2017 - 11:15am