Thirty-six Democratic members of Congress are asking Puerto Rico’s legislature to reject a May 3 proposed agreement for restructuring $8 billion in debt issued by the Puerto Rico Electric Power Authority.
The agreement “would increase prices by up to 21%” and it’s “highly unlikely PREPA will be able to completely offset the legacy debt charges,” resulting in “considerably higher electricity rates for decades to come,” said the letter signed by four senators and 32 House members.
House Natural Resources Committee Chairman Raul Grijalva of Arizona spearheaded the letter, which was signed by three senators seeking the Democratic 2020 presidential nomination — Bernie Sanders of Vermont, Elizabeth Warren of Massachusetts and Kirsten Gillibrand of New York.
Sen. Robert Menendez of New Jersey, a frequent advocate on behalf of the island commonwealth, also signed the letter.
Tom Sanzillo, who last month criticized the deal as too generous to bondholders, said in an email he welcomed the congressional opposition to the deal.
“There is a growing concern expressed now by Congress but also from labor and business and community that this deal is wrong for Puerto Rico," said Sanzillo, director of finance at the Institute for Energy Economics and Financial Analysis. “As the consensus about the problems with the deal grow, we think it may make it less likely that it is approved. The debate is taking place in public opinion, in courts, in legislative halls, in the houses of finance on Wall Street and the energy companies involved. We expect that if a response is made on the merits that it will be disapproved.”
On the other hand, a deal negotiated between the governor and the Oversight Board “should carry a lot of weight with the legislature,” said Howard Cure, director of municipal bond research for Evercore Wealth Management.
Cure has criticized the deal because it fails to lower PREPA's operating costs by addressing overstaffing.
“The legislature seems impervious to demands from outside parties, including bondholders and the federal government, and seems to want to maintain what I consider to be high government employment levels, salaries and benefits,” Cure said in an email. “Only to the extent that Congress can help with additional funding or foster more beneficial trade and tax laws in exchange for rejecting the PREPA agreement, would the legislature be swayed.”
PREPA agreed to the May 3 Restructuring Support Agreement in a multiparty deal involving the Financial Oversight Board, the Puerto Rico Fiscal Agency and Financial Advisory Authority (“AAFAF”), the Ad Hoc Group of PREPA Bondholders, and Assured Guaranty Corp.
Assured Guaranty has the option under the RSA to guarantee its allocated share of the securitization exchange bonds, which may then be offered and sold in the capital markets. Assured Guaranty has said it “believes that the additive value created by attaching its guarantee to the securitization exchange bonds would materially improve its overall recovery under the transaction, as well as generate new insurance premiums; and therefore its economic results will differ from those reflected in the RSA.”
Puerto Rico Gov. Ricardo Rossello has described the RSA as “a monumental step to provide for the restructuring of the debts and obligations of PREPA and finally conclude the bankruptcy process."
Rossello said in a press statement on the day the agreement was announced that “the restructuring of PREPA's debt is critical to realize our vision of a client-centered energy sector that promotes investment and economic development on the island."
The governor also said that the privatization of PREPA is already underway through several public-private partnerships.
Finalization of the restructuring agreement is subject to approval by the federal Bankruptcy Court handling the Title III case and requires a minimum of 67% support of voting bondholders for a plan of adjustment as well as the execution of acceptable documentation and legal opinions.
At a Wednesday court hearing in San Juan, U.S. District Court Judge Laura Taylor Swain, who is presiding over the case, “raised doubts about the adequacy and reasonableness of the debt agreement,” according to a report by Caribbean Business.
“I think that the scope and complexity of the deal demands significantly more to demonstrate that the deal reached by the parties is fair and equitable,” Swain was quoted as saying.
The newspaper El Nuevo Dia, which also covered Wednesday’s hearing, said the judge “warned that she will not give way to an agreement that involves changes in PREPA’s rates and could require legislation without being sure that she has authority to do so.”
Under the deal, current bonds would be exchanged for Tranche A and Tranche B bonds. Tranche A bonds would have a par value equal to 67.5% of the value of existing bonds. They would be tax-exempt, hold a 5.25% coupon, and have a 33 year expected maturity and a 40 year final maturity.
Tranche B bonds would be “growth bonds” only payable if there were certain levels of island electrical use. The tax-exempt bonds would have a 7% interest rate and the taxable bonds would bear 8.75%. Interest would be paid in additional tranche B bonds rather than cash. They would have a 47-year final maturity.
Prior to the final approval of the RSA, PREPA would start to charge 1 cent per kilowatt-hour to support the debt, with the extra penny per kilowatt-hour added to customer bills as a “transition charge.” The transition charges would start at 2.768 cents/kwh in fiscal year 2021 and rise gradually to 4.552 cents/kwh in fiscal year 2044 and the following years.
The governor contrasted the new restructuring agreement to a deal proposed in 2016 which would have allowed additional increases in the transition charge if overall electrical demand dropped in the future.
The May 3 announcement the Puerto Rico Fiscal Agency and Financial Advisory Authority “estimates that, during the next 10 years, the agreement will reduce debt service by approximately $3 billion and more than 40% in relation to the terms of the restructuring agreement negotiated by the previous administration in 2016.”
The Ad Hoc Group of PREPA Bondholders released a statement saying, “We encourage other bondholders to sign on to the deal quickly in order to maximize their own recoveries and provide certainty on PREPA’s path forward.”
According to bond insurer analyst Mark Palmer, BTIG managing director, MBIA had $1.089 billion of gross insured exposure to PREPA debt and Assured Guaranty had $848 million on net insured exposure to PREPA debt.
The deal offers Assured and holders of Assured-insured bonds several options for dealing with the restructuring of PREPA’s bonds. Certain options would involve Assured insuring the new securitized bonds. With insured Tranche A bonds, Assured would be paid a sum equal to 0.5% per year of these bonds’ principal amount. The transition charges would be used to make these payments.
In addition, Assured is to be given a one-time payment in the form of Tranche A bonds having a principal equal to 2% of the expected aggregate cash flow of any Tranche B bonds it insures.
The agreement specifies no similar options for National Public Finance Guarantee, which is no longer writing new policies and declined to comment for this story.
