WASHINGTON – The Puerto Rico oversight board’s decision to reject the Puerto Rico Electric Power Authority’s Restructuring Support Agreement contradicts stances taken by Republicans and insurers, who say the board acted without a legal basis.

Democrats praised the move, saying it saves the commonwealth from economic setbacks.

The board rejected the PREPA RSA during an executive session held on Tuesday. Its decision “closes the door” on the power authority’s prior efforts to reach a consensual agreement with creditors under Title VI of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), according to the board.

PROMESA was created by Congress to help address Puerto Rico’s fiscal crisis. The decision also means “the most likely course of action under the circumstances would be a debt restructuring process” under the bankruptcy-like provisions of PROMESA, the board said.

The RSA, which has varied over the roughly three years it has been negotiated, would have covered $9 billion in debt and had bondholders accept a 15% reduction in principal in exchange for new, better protected debt. It also would have come with a new rate charge for Puerto Ricans.

Rep. Rob Bishop, R-Utah, said in a letter earlier this month that the possibility of the oversight board not approving the RSA was “troubling” because “the decision to implement the RSA had already been made by Congress with the passage of PROMESA.”

Bishop, who chairs the House Natural Resources Committee that formulated PROMESA, said that the way PROMESA was written showed Congress’ intent to include the PREPA RSA as a consensually negotiated, voluntary agreement under the law and that its inclusion “obviated the need for any substantive action or oversight of the RSA by the oversight board.”

He added the board’s action regarding the RSA was “outside the scope of the oversight board’s powers and a violation of PROMESA.”

The board said it “gave serious, professional and deliberate consideration” to the RSA but rejected it because it “did not support the structural and operational reforms required to attract additional capital to PREPA that will enable its much-needed transformation.”

The PREPA bondholder group said in a release that it believes the board “fundamentally misunderstood the deal” and while it is “considering all options” is still open to working with the board.

“The RSA is a good deal for both sides that puts PREPA on a path to revitalization, while providing the flexibility for unlimited privatizations if that is the public policy chosen, a process beyond our role as creditors,” the bondholders said. “The notion that the deal will drive up rates is false.”

Democrats, including Rep. Raúl Grijalva of Arizona who is the top Democrat on the House Natural Resources Committee, said the board was right to reject the RSA over concerns about costs to citizens and economic growth.

Rep. Rob Bishop, R-Utah, chairs the House Natural Resources Committee with oversight of Puerto Rico
House Natural Resources Committee Chair Rob Bishop

“The restructuring proposal treated Puerto Rican people as an afterthought,” Grijalva said. “We’ve seen too many attempts to treat millions of U.S. citizens as a bondholder piggy bank rather than a community in need of assistance, and I join the Puerto Rican people in sincerely hoping the board has put that to an end with this decision.”

Rep. Nydia Velázquez, D-N.Y., said the board’s decision “will benefit Puerto Rico, its residents, its local businesses and its long term prosperity.”

“While every decision the board makes will be necessarily controversial, this decision demonstrates the board can act in the interests of the Puerto Rican people as Congress intended,” Velázquez said. “Now, the Board must take the next logical step and enter into Title III with regard to PREPA's financial obligations.”

Velázquez and Grijalva wrote a letter to the oversight board earlier this month countering Bishop and urging it to reject the RSA.

Howard Cure, director of municipal bond research at Evercore Wealth Management, LLC said overruling a separately negotiated agreement does not bode well for other Puerto Rico bondholders.

“How well bond holders will do in court is always a mystery given the lack of precedent and the uniqueness of this situation,” he said. “However, it seems as if the Board is taking a more holistic approach to the Commonwealth's budget, debt and economy.”

The oversight board’s rejection of the RSA comes after two bond insurers, MBIA’s National Public Finance Guarantee Corp. and Assured Guaranty, filed a lawsuit to block the board from rejecting the agreement.

Assured fired back after the board's action saying that after three years and millions of dollars spent by creditors and the Commonwealth, the PROMESA Oversight Board failed to perform its ministerial duty of certifying the RSA for execution under Title VI of PROMESA, which covers consensual restructurings.

Assured Guaranty CEO Dominic Frederico is upset by the decision allowing PREPA to proceed with bankruptcy.
Dominic Frederico Bloomberg News

"This is yet another example of a rogue Oversight Board that continues to violate sections of PROMESA, which in this case clearly deemed the RSA a Preexisting Voluntary Agreement outside the scope of Oversight Board renegotiation,” said Dominic Frederico, president and CEO of Assured, in a release late Wednesday afternoon. “The clear intent of PROMESA was to restore fiscal responsibility, credibility, and access to capital markets, while arriving at consensual resolutions wherever possible and providing a safe harbor for this lone existing deal. This rejection of the PREPA RSA makes clear that the Oversight Board is not seriously seeking the consensual resolutions with creditors that PROMESA was intended to encourage. The rejection of this consensual agreement will force PREPA into years of litigation, costing millions of dollars and driving up costs for customers.”

Frederico continued to say that the PREPA creditors, through the RSA and prior forbearance agreements, have already provided more than $1.2 billion in liquidity, and the RSA was set to provide further refinancing and deferrals for an additional $2.2 billion in debt service relief, as well as $850 million in debt reduction and a drop in the necessary rates charged to consumers.

"The RSA would have provided room for capital improvements and operational reform, giving PREPA significant breathing room to modernize its facilities and stabilize its finances,” he said.

Assured has $12 billion in claims-paying resources across its group of companies, which includes an $11 billion investment portfolio that alone generates approximately $400 million of annual investment income, said that its liquidity and capital position are very strong.

The largest municipal bond insurer also said that payments to holders of PREPA bonds insured by Assured will continue to be paid without interruption for the life of the bonds and that it unconditionally and irrevocably guarantees full and timely payment of scheduled debt service, in accordance with the terms of Assured Guaranty's insurance policies and, upon payment, takes over the rights of the insured bondholders.

NPFG also put out a release, in which it said it was “disappointed in the oversight board’s decision to not approve the PREPA RSA” and that it believes “the decision is in violation of the PROMESA law.”

“National will continue to pursue its lawsuit in the U.S. District Court for the District of Puerto Rico that seeks to compel the oversight board to comply with its obligations under PROMESA and remains committed to working with the Commonwealth and PREPA to find a sustainable, long-term solution for the people of Puerto Rico,” the muni arm of MBIA Inc. said.

As of March 31, 2017, National had $4.6 billion of claims-paying resources, which it says is adequate and ensures that its policyholders will receive the full amount of the scheduled interest and principal payments that come due on their National insured bonds. National is fresh off a two-notch downgrade.

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