Debt audit commission says latest PREPA debt deal is unsustainable
By The Star Staff
After Resident Commissioner Jenniffer González Colón proposed using surplus government funds to cancel the Puerto Rico Electric Power Authority’s (PREPA) debt to avoid rate hikes, a report by the Citizen Commission for the Comprehensive Credit Audit analyzing the latest PREPA debt deal found that it is unsustainable for the economy.
The report, titled “New Payment Proposal to PREPA Bondholders: Unsustainable for the People of Puerto Rico,” notes that although the payments to bondholders will be less than in previous deals, they would still hurt businesses and consumers.
“The proposed increases over 35 years could hinder a recovery that manages to get the country out of more than 15 years of economic stagnation,” Citizen Commission President José Alameda said. “A small business that consumes 1500 kWh [kilowatt-hours] of energy would pay $35.39 monthly. A supermarket that consumes 110,000 kWh monthly would pay an additional $1,509 on its bill just to pay bondholders. The increases also make it difficult to rebuild the electrical system in Puerto Rico, which is already in a critical state.”
The Financial Oversight and Management Board for Puerto Rico presented its third amendment to the debt adjustment plan (PAD by its Spanish acronym) for PREPA in August of this year. The latest proposal seeks to reduce PREPA’s bond debt from $8.3 billion to $2.3 billion, representing a 72% reduction. However, the burden of the payments still falls directly on consumers through increases in their electricity bills.
According to the report, the people of Puerto Rico will be paying for the new bonds until 2059; that is, over the next 35 years, an extremely long time for an electrical system that is in such poor condition. The interest that will be paid on the bonds reaches just over 7%, a high rate that weakens PREPA’s finances. Although the new bonds are for around $2.3 billion, the island would actually pay more than double that, or $5.15 billion when adding in interest payments. That number also does not include the possible costs for the CVIs, or the million-dollar payments in fees or commissions, so that the final price could be much higher, to the apparent detriment of the people of Puerto Rico, the Citizen Commission report noted.
“One of the big problems of this PAD is that through a scam, it makes invisible the real payment that the vulture funds would receive,” said Eva Prados Rodríguez, a spokesperson for the Citizen Commission. “The PAD stipulates, for example, that the central government will allocate $400 million to pay creditors for their legal fees and financial advice. It is also striking that the five vulture funds that support the PAD committed to purchasing around $1.6 billion of the new bonds to be issued. In exchange, these funds will collect 8.25% of the total of these bonds in commissions, which implies a payment of around $124 million, plus additional fees of approximately $74 million.”
José Rivera Santana, a planner and spokesperson for the Citizen Commission, said “our analysis is that a central government payment of $670 million in cash for fees and commissions to bondholders, in addition to new bond issues, is a diversion of funds necessary to avoid pension cuts, address the retiree crisis and urgently rehabilitate the electrical system itself.”
“PREPA pensioners are particularly affected by this PAD, as it does not articulate a clear funding source for pensions, raising concerns about pension payments and future increases to the bill,” he said. “Before the central government uses resources from the General Fund to pay bondholders of unsecured debt, it must urgently address the Retirement System crisis to avoid new increases.”
“The report concludes that the third amendment to PREPA’s PAD is unsustainable in the long term, as it continues to put the ]payment of debt to bondholders above the payment of pensions, the reconstruction of our deteriorated electrical system, and economic development of the country, which is why Puerto Rico must oppose this plan, ensuring a better future for its people,” Rivera Santana said.
Meanwhile, on Tuesday, criticism continued of González Colón’s proposal to use government funds to cancel PREPA’s debt. The resident commissioner and gubernatorial hopeful said the island Treasury’s coffers have $8 billion in surpluses that could be used to pay the $2.6 billion owed to PREPA.
John Mudd, a bankruptcy lawyer, said on social media that once the PAD is confirmed, it cannot be changed.
“The new bonds have acceleration clauses that ban the early payment of a debt,” he said.
He said the PAD is expected to be confirmed by the federal Title III bankruptcy court next year, long before the November election.
Former oversight board member Justin Peterson wrote on social media that “@JGO_2024 @Jenniffer has always been somebody who will say anything, take any position to win an election.”
“Not a leader, and not taken seriously in Washington either,” he posted. “By the way, $2.5 bln won’t achieve a consensual deal that ends bankruptcy at @AEEONLINE either.”