Disagreements over debt plan up odds of PREPA’s bankruptcy case being dismissed
By The Star Staff
The lack of consensus on a proposed plan of adjustment has elevated the odds of a dismissal of the Puerto Rico Electric Power Authority (PREPA) bankruptcy case and the possible imposition of a receiver.
Over the past two days, numerous objections against the debt plan have been submitted to the federal Title III court from citizens and business groups citing the impact that rate hikes will have on Puerto Rico’s economy. Bondholders holding some $8.4 billion in claims oppose PREPA’s debt adjustment plan because they will get very little return under it.
Monoline insurers Assured Guaranty Corp. and Assured Guaranty Municipal Corp. have provided notice to the court and the U.S. attorney general of their objection to the debt plan on the grounds that it violates the uniformity requirement of the Constitution’s Bankruptcy Clause.
In May, U.S. District Court Judge Laura Taylor Swain warned about the hardship a dismissal would bring but noted that “if confirmed as a non-consensual, widely contested plan, then litigation is certain to continue.”
Attorney and legal analyst John Mudd said he believes there is a risk of a dismissal.
“The great question now is whether she [Swain] will approve a plan that does not have support or dismiss the case,” he said.
Mudd noted that the Financial Oversight and Management Board knows there is a risk of a dismissal but has declined to up the offer it has made to bondholders.
PREPA’s retirement system and the Electrical Industry and Irrigation Workers Union have objected to the plan of adjustment but in their petitions have asked the judge to reject the plan and force the parties to go back to the drawing board.
On Tuesday, the New Progressive Party (NPP) caucus in the House of Representatives, headed by Minority Leader Carlos “Johnny” Méndez Nuñez, rejected the 28% rate increase contained in PREPA’s debt adjustment plan.
The NPP caucus reminded the oversight board that among its responsibilities is to ensure Puerto Rico’s economic growth and stability.
“We absolutely reject the 28 percent increase in the utility bill both for residences and businesses, proposed in PREPA’s debt adjustment plan under consideration by Judge Swain,” Méndez Nuñez said. “There is no way that Puerto Rico can withstand this increase. We remind the Board that part of its function is the economic development of Puerto Rico, but this increase will do the opposite.”
What would happen if Swain dismissed PREPA’s bankruptcy case? PREPA will lose the protections it has under the current stay, which prevents lawsuits against the utility. Mudd said the Ad Hoc Group of PREPA bondholders will seek the appointment of a receiver as they have the 25% needed for such a move per the 1974 Trust Agreement.
“I have been saying for the longest time that Swain is tired of this case,” Mudd said, adding that cases against PREPA will go to another judge.
The divisions appear to be huge. The mediation team, after conducting in-person mediation sessions on May 22 and May 23 in which the oversight board, the Ad Hoc Group, Assured, Syncora, and the island government’s Fiscal Agency and Financial Advisory Authority (AAFAF by its Spanish initials) participated, said it appears that such discussions are now at a standstill. It is unclear to the mediation team when (or whether) discussions will resume.
AAFAF said PREPA and the people and businesses it serves cannot bear unsustainably high rates, particularly given that, compared to the mainland United States, Puerto Rico has the lowest median household income and one of the highest electricity rates.
“AAFAF remains concerned that the Plan’s proposed Legacy Charge will overly burden Puerto Rico’s residents and businesses. Creditor demands that PREPA charge more could not only imperil PREPA’s future feasibility, but also threaten Puerto Rico’s fragile recovery from years of economic depression, natural disasters, and pandemics,” the AAFAF said in a statement. “An excessive increase in rates may force Puerto Rico’s residents to choose between paying for medication or other basic necessities and keeping their lights on. It may also force businesses to close their doors permanently and stall Puerto Rico’s economic development.”
Although it is subject to change, the PREPA debt plan proposes to restructure PREPA’s debt principally through issuance of $5.68 billion of new bonds to fund partial recoveries on creditors’ claims. PREPA owns about $8.26 billion in revenue bonds, plus some $218 million in prepetition accrued interest on such bonds. The utility also owns $700 million in fuel line loans and projects roughly $246 million to $4.9 billion in general unsecured claims. It also has over $3 billion in unfunded pension liabilities.
Under the proposed plan, PREPA will pay for the new bonds over 35 years through revenues from a legacy charge to PREPA’s customers.
The legacy charge for certain customers not currently benefiting from subsidized electricity rates is about $19 a month that will be added to the utility bill. The charge, which will be used to pay bondholders, would exclude qualifying low-income residential customers from a connection fee and kilowatt-hour (kWh) charge for up to 500 kWh per month. For non-subsidized residential customers, the proposed PREPA legacy charge would be: a flat $13 per month connection fee, and 75 cents per kWh for up to 500 kWh per month of electricity provided by PREPA, and 3 cents per kWh for electricity above 500 kWh per month.
For commercial, industrial and government customers, the PREPA legacy proposed charge would entail: a connection fee of between $16.25 for small business customers, $20 per month for smaller industrial companies, and $1,800 per month for large businesses proportional to their current rate.