Union leader, lawyer: PREPA debt deal with unlegislated bond issue in the works
By The Star Staff
The president of the Electrical Industry and Irrigation Workers Union (UTIER by its Spanish acronym) and a bankruptcy lawyer warned the House Treasury Committee on Thursday that the government is preparing to reach a debt deal that would restructure the $9 billion debt of the Puerto Rico Electric Power Authority (PREPA) through a bond issue that will not be backed up by bond legislation and that some of the utility’s debt may be illegal.
Their remarks were made at a hearing to examine the legality of PREPA bond issues made from March 26, 2010 to Dec. 31, 2016. The bond issues may have been illegal because they were executed while PREPA was insolvent.
The committee, chaired by Rep. Jesús Santa Rodríguez, received explanatory papers from bankruptcy lawyer Rolando Emmanuelli-Jiménez, UTIER President Ángel Figueroa Jaramillo, former Popular Democratic Party Sen. Ramón Luis Nieves Pérez and attorney Eva Prados Rodríguez.
In their presentation, both Figueroa Jaramillo and Emmanuelli-Jiménez, who is the legal representative of UTIER, strongly stressed that the Puerto Rico Legislature must stand against the authorization of any transaction with the bondholders in PREPA’s Title III case.
Figueroa Jaramillo warned that with the cancellation of the Restructuring Support Agreement (RSA) -- which intended to pay bond creditors through an increase in the power rate that would have reached about 4.6 cents per kilowatt-hour -- the most likely scenario is that the Financial Oversight and Management Board would negotiate an agreement in which the bonds are not insured, but which represent a higher recovery for the bondholders, which could be around more than 80%.
“The [oversight] board could try to make this agreement, leaving aside the Legislature, and approve it only with the endorsement of PREPA’s governing board, without even going through the [Puerto Rico] Energy Bureau, since the bureau’s law has been amended to remove its powers to evaluate the restructuring,” the UTIER leader said. “An 80% recovery would have to be paid with a higher rate increase that could be up to 8 cents per kilowatt-hour. This would be devastating for PREPA, the debt adjustment plan and Puerto Rico.”
Talks toward a proposed debt restructuring were extended until next month.
The union leader said further that PREPA’s debt adjustment plan based on substantial payments to bondholders could lead to increases that would make the cost of operating businesses in Puerto Rico “intolerable and worsen” the crisis of inequality in the country because many people would not be able to pay their electricity bill.
‘’According to a study carried out by economist Ramón Cao García, the effects of the increase in rates [would be] the closure of thousands of businesses with the loss of more than 170,000 jobs,” Figueroa Jaramillo said. “Likewise, another study by the Committee of Uninsured Creditors and carried out by the prestigious firm London Economics International LLC showed that PREPA will not be able to survive the consequences of an unsustainable agreement, which means that it leaves essential creditors unprovided and without payment and operations, causing us to end up in a second bankruptcy.
The UTIER president also warned of the more than $800 million that PREPA owes to the Retirement System.
Prados Rodríguez, a representative of the Citizen Commission for the Comprehensive Audit of Public Credit, stressed that between 1974 and 2016 PREPA issued the ‘’Power Revenue Bonds’’ in accordance with a ‘’Trust Agreement’’ with the bondholders.
She presented a series of findings after conducting a comprehensive audit of Puerto Rico’s public debt along with the Citizen Commission. Among the audit’s revelations was that PREPA artificially inflated its projected collections in order to comply with the provisions of the “Trust Agreement” with its creditors and in order to have net collections that are at least 120% higher than the payments for its debt.
‘’They did this in order to be able to continue issuing bonds, although they did not have the legal authority or income scenarios to meet those obligations,” the attorney said.
Another of the findings presented was that the bondholders and intermediaries who bought the debt knew or should have known that PREPA was in violation of the clauses and assumed the risk, Prados Rodríguez said.
“PREPA repeatedly published financial statements and other relevant information after the due date,” she said. “Subscribers knew that the Authority had not met its disclosure obligations. There is no doubt that PREPA hid information from potential creditors.”
“Another core aspect to investigate is the relationship between the uses announced in the official statements for the funds to be received through the bond issues and the final use for the aforementioned funds,” Prados Rodríguez continued. “It emerges from the official statements from some of these issuances that PREPA planned to use these funds for infrastructure works, such as the cases of the north and south gas pipelines, which were never built.”
According to reports such as that of Kobre & Kim, commissioned by the oversight board, PREPA paid close to $400 million to contractors for the gas pipeline projects, despite the fact that they never had all the necessary permits and authorizations to be built, Prados Rodríguez said.
Likewise, the Citizen Commission denounced a conflict of interest due to Citigroup’s participation in the restructuring of PREPA.
‘’Since 2017, CitiGroup has served as financial adviser to the [oversight board] in the public debt restructuring process,” the attorney said. “In addition, since February 2018 CitiGroup has advised the board on matters related to the restructuring and privatization of PREPA. This position places them in a conflict since Citi was a participant in PREPA’s indebtedness.”