The San Juan Daily Star
PREPA bondholders: Loss of secured status would violate basic principles of municipal finance
By The Star Staff
If the Puerto Rico Electric Power Authority (PREPA) and the Financial Oversight and Management Board were allowed to eliminate the secured status of some $8.3 billion in bondholder claims, it would be a taking of property without just compensation and would go against recognized principles in municipal finance, bondholders argued this week.
That is the answer filed by the U.S. Bank National Association, the trustee for the Trust Agreement for PREPA bonds, bondholders and monolines, as it rejected the oversight board’s claims that the bonds are virtually unsecured. The document included the Ad Hoc Group of PREPA Bondholders, Assured Guaranty Corp., Assured Guaranty Municipal Corp., National Public Finance Guarantee Corp., and Syncora Guarantee Inc. (PREPA bondholders collectively) which together own or insure over $5 billion in outstanding PREPA bonds by principal amount.
“PREPA’s pledge of all revenues of the system is consistent with how revenue pledges are commonly used in municipal finance, where they are generally understood to create a lien on present and future revenues to secure the repayment of bonds,” the bondholders argued. “Indeed, given the massive cost of municipal projects relative to project revenues at any given moment in time, revenue pledges could not work any other way.”
After talks between the oversight board and PREPA bondholders failed as part of the process to restructure some $9 billion in debt, the board is challenging the secured status of the bonds. If the bondholders prevail, consumers will end up paying high power costs.
The bondholders argued that PREPA borrowed billions of dollars from bondholders under its 1974 Trust Agreement to finance capital improvements to Puerto Rico’s electrical generation and distribution system, among other purposes. To facilitate the massive scale of those borrowings, PREPA and the commonwealth government had to assure bondholders that they would be repaid from the revenues generated by that system over the decades required to repay the debt.
In the Trust Agreement, PREPA exercised its statutory authority to provide for its bondholders’ repayment by making mutually reinforcing covenants with the bondholders and their trustee for the purpose of making the bonds an attractive investment. Those covenants obligate PREPA to, among other things, set rates, send bills and collect revenues sufficient to pay PREPA’s debt. And those revenues must, after providing for necessary expenses, be credited to special funds earmarked for bondholders’ repayment. These covenants together ensure bondholders’ rights to a dedicated stream of special revenues to satisfy PREPA’s bond debt through its maturity.
“Those are not empty promises,” the bondholders said.
The bondholders noted that PREPA has neglected to collect revenues owed to the company that could be used to pay bonds in violation of the Trust Agreement. PREPA has failed to collect hundreds of millions of dollars in accounts receivable from municipalities, instrumentalities and agencies as required under the Trust Agreement. It has accumulated a $420 million excess liability for payments made to municipalities in lieu of taxes. And it has an accounts receivable balance of over $200 million from public instrumentalities.
In addition, PREPA has failed to raise rates to levels required to ensure revenues sufficient to pay current expenses and debt service, the bondholders say.
“Further, PREPA has deposited $148.3 million from the General Fund in the Government Development Bank of Puerto Rico [GDB],” the bondholders argued. “PREPA has not sought the return of those funds in order to pay bondholders as required under the Trust Agreement, even though GDB has misappropriated PREPA’s monies in violation of the automatic stay.”