Puerto Rico Oversight Board sends PREPA to Title III, approves budget

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The Puerto Rico Oversight Board approved sending the island's electric power authority into the Title III bankruptcy process and passed a consolidated budget that includes $913 million of debt service for fiscal 2018.

The motion unanimously approved Friday allows board chairman Jose Carrion III to decide when to actually file the papers for Title III for the Puerto Rico Electric Power Authority, with about $9 billion of debt.

The move follows the board’s decision to reject a Restructuring Support Agreement developed over three years between authority and its creditors. Board Chairman José Carrión III said Friday that the vote on the rejection was the board’s only vote that hasn’t been unanimous. He didn’t say what the vote was.

Title III is a court-managed bankruptcy process found in the Puerto Rico Oversight, Management, and Economic Stability Act.

In a press conference after the meeting Carrión said that the delay in actually filing for Title III is to allow conversations with creditors to continue for the time being.

To explain the board vote against the existing RSA, Carrión said it had “open issues,” that it didn’t explain how $500 million would be found to close the agreement, and that it would have pushed electricity rates higher, which in turn would have hurt Puerto Rico’s economy.

Along with concerns about increased electrical prices, Evercore director of municipal research Howard Cure said, “the board also seems to have an eye on potentially privatizing the electric system, as well as other enterprise systems, and adding additional charges could also hinder that transition.”

Also on Friday the board voted to approve its own version of the fiscal year 2018 budget for the Commonwealth of Puerto Rico.

The General Fund budget has $0 for debt service. The wider consolidated government budget has a total of $913 million for debt service in fiscal year 2018. According to a board-posted summary, it anticipates PREPA paying $583 million, the Puerto Rico Aqueduct and Sewer Authority paying $313 million, and some branch of the government paying $18 million for federal debts.

The board’s approved fiscal plan through fiscal years 2026 indicated the central government and its bonding authorities would pay $404 million in fiscal year 2018. Neither PREPA nor PRASA are considered part of the central government.

The Bond Buyer reached out to spokesmen for the board and the Puerto Rico Fiscal Agency and Financial Advisory Authority and board member Ana Matosantos to explain the apparent discrepancy between the budget and the fiscal plan and didn’t receive responses.

“The budget will allocate funds for debt service after a Title III plan of adjustment is confirmed or Title VI agreements are approved by the court,” the board states in a summary of its budget. It doesn’t state when it expects this to happen or where the money would be found for it, if it happens within fiscal year 2018.

The budget indicates that, excepting measures to improve sales and use tax collections, the board expects collections from these taxes to decline by 9%. This may indicate that the board expects the Puerto Rico Sales Tax Financing Corp. (COFINA) bonds to still be paid in fiscal 2018 because if the government invaded COFINA for its revenue the sales and use tax revenues would go up.

According to an October 2016 document from Puerto Rico, $737 million of payments for COFINA bonds are scheduled in fiscal 2018.

According to a source among the COFINA bondholder representatives, his group expects COFINA bonds to be paid until either the commonwealth runs low on liquidity, which it has said may happen in November, or there is a court ruling in the dispute between general obligation and COFINA holders. He also said that $753 million was due for COFINA bonds in fiscal year 2018.

The approved fiscal 2018 budget includes $1.9 billion in measures towards putting the government on the path to financial sustainability, the board stated. The board expects this to jump to $3.4 billion in fiscal 2019.

The General Fund budget is 9% lower than the fiscal year 2017 General Fund budget, if one excludes pension adjustments. The fiscal 2018 General Fund budget has added $1.4 billion to cover pension spending on a pay-as-you-go basis, the board stated. Including the pension adjustments, the approved General Fund is up 6.3%.

The fiscal 2018 government consolidated budget, which includes the public corporations, is down by 0.4% compared to that for fiscal 2017.

Hector Negroni, a member of the Ad Hoc Group of GO Bondholders, said the board continues to misrepresent the facts. The reality is collections are at a high and budget spending is as well, he said. The GO bond payment has a priority in both the Puerto Rico Constitutions and PROMESA and yet it is receiving no money even as various non-essential services are being funded.

During the meeting Senate Minority Leader Eduardo Bhatia Gautier asked the board as to whether they believed there were automatic government worker furlough and end of Christmas bonus triggers in the board-adopted fiscal plan.

Carrión and board member José González said the measures were part of the fiscal plan.

Gov. Ricardo Rosselló has said they are not part of the fiscal plan and that the board has no right to order them.

If these measures are triggered, Carrión said he expected Rosselló to implement them. If the governor doesn’t do so, the board would take the matter to court, Carrión said.

On Friday the board also approved fiscal year 2018 budgets for the Government Development Bank for Puerto Rico, Highways and Transportation Authority, Puerto Rico Aqueduct and Sewer Authority, and PREPA. The resolutions for the budgets stated that the previously certified fiscal plans for these entities will have to be revised in the 45 days and that the budget will have to be revised to make them consistent with the plans, after the plans’ approval.

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PROMESA Puerto Rico Electric Power Authority Commonwealth of Puerto Rico Puerto Rico