The warning on PREPA's RSA fees and on the cost of Puerto Rico's Title III cases appears in a partial objection before Judge Laura Taylor Swain. (GFR Media)

While studies by economists and sociologists suggest that the agreement with the organized bondholders group of the Puerto Rico Electric Power Authority (Ad Hoc-PREPA) and the insurance company Assured Guaranty would aggravate the island's complicated economic situation, the agreement will cost Puerto Ricans millions of dollars in fees and payments that will not be subject to tax withholding and will not have to be disclosed to the public or the court, warned fee examiner Brady C. Williamson.

The total cost of the negotiations regarding the Restructuring Support Agreement (RSA) in PREPA is unknown to date, but according to Williamson, executive at Godfrey & Khan, the bill seems to be increasing and will have to be added to the costs of Title III cases in Puerto Rico, which are already about  $530 million.

The warning on PREPA's RSA fees and on the cost of Puerto Rico's Title III cases appears in a partial objection before Judge Laura Taylor Swain. Williamson explained in the document that the Board and the government have virtually  granted a "blank check" to pay the fees of those creditors who sign the RSA. Faced with this situation, which according to the fee examiner officer would even be contrary to the the Bankruptcy Code provisions, the court will not be able to determine whether in effect the cut to PREPA's public debt is reasonable, as alleged by the Oversight Board.

In a separate motion, Zolfo Cooper (ZC), financial advisor to the UCC, told Swain that the fees could reach $63 million if the RSA is approved. And then, interests of up to $580 million and other items would be added to that cost. Even if the RSA fails, as it is subject to multiple factors such as new legislation, RSA participants would charge up to $293 million, according to ZC.

The small print of the RSA

Williamson stressed that, if approved, every home and business in Puerto Rico will bear the cost of implementing the motion and the RSA - including the payment of undisclosed and unlimited professional fees - through an increase in  electricity  rates which are already among the highest at the national level.

The Board hopes that Swain endorses  PREPA's RSA under Rule 9019 of the Bankruptcy Code as a prelude to the public corporation's debt adjustment plan that would restructure other obligations, such as pensions, credit lines wth fuel lenders  or contracts with renewable energy suppliers.

Williamson said that from the point of view of cost and administrative expenses, the RSA and the arguments  supporting  it provide the court, interested parties or the public with the information necessary to evaluate it, even under the standards of rule 9019, which is generally more permissive than comparable standards for confirming a plan.

About six months ago, the Board and the government presented Swain with the PREPA RSA, after renegotiating the terms of a first  agreement rejected in 2017.

Among other things, the renegotiation of the RSA reconfirmed the transition charge that will be created to pay bondholders. But according to the Board, instead of the charge being arbitrarily adjusted, it would progressively increase to reach  over four cents per kilowatt-hour (kWh) in 47 years.

When the revised RSA was announced, El Nuevo Día reported that PREPA would initially pay about $25 million in fees. After July 2018, PREPA would make additional payments to RSA participants through a special charge of one cent per kilowatt-hour. The RSA contemplated that the special charge would  start last July.

El Nuevo Día asked PREPA if the utility had paid fees as a result of the RSA, but by press time, there was no answer.  

A multi-million dollar litigation

The special charge to pay the fees of Ad Hoc-PREPA and Assured Guaranty has not been implemented partly because the UCC and other PREPA creditors are fighting in court  to prevent its approval.

In short,  objectors, including the Union of Electrical Industry and Irrigation Workers Union (Utier), understand that the agreement is legally and financially unsustainable.

Just after Governor Wanda Vázquez Garced arrived at La Fortaleza, the government said it would analyze the agreement, but to date, the conclusion of that analysis is still unknown.

During the October general hearing, Luc A. Despins, UCC's leading lawyer, warned Swain about the situation, a point that Board lawyer Martin Bienenstock agreed with.

Según Despins, litigar el RSA-AEE le ha costado millones de dólares a Puerto Rico sin conocer si, en efecto, el gobierno todavía respalda la transacción.

According to Despins, litigating PREPA's RSA has cost Puerto Rico millions of dollars without knowing if, in fact, the government still supports the transaction.

Swain plans to discuss the RSA during the December hearing, however,  the discovery of evidence - that both the UCC and the investment firm Sola LTD and Cortland Capital, administrative agent of the fuel line financed by Scotiabank and other banks, have requested - must be completed first.

Lack of transparency in the negotiation process by the Board and  payment of fees and other compensations to the RSA participants which,  the group considers  are not justified are among the UCC arguments.

This seems to be confirmed in an analysis by Scott Martínez, executive of UCC's financial advisor - ZC - before Judge Swain.

According to Martínez,  lawyers and advisors fees  could reach $63 million.

But the agreement, according to the executive who has over 20 years of experience in restructuring processes, proposes another multiplicity of payments that would raise the agreement's negotiating cost to about $1.538 billion.

According to the analysis based on the terms of the RSA, if Court rejected PREPA's plan twice, those signing the agreement could take up to $849 million with them. And if the agreement were terminated, the compensation that the Ad Hoc-PREPA and the Assured, National and Syncora insurers would receive would be about $293 million.

Title III costs

Only $63 million in professional fees for PREPA's RSA participants would increase the cost of Title III cases to nearly $600 million, based on numbers provided by Williamson.

That bill is already partially pending even when the Board has not completed the restructuring process for the central government, the Retirement Systems Administration (ERS), the Public Buildings Authority (PBA), and the Highways and Transportation Authority (PRHTA).

Last September, El Nuevo Día reported that as part of the first five billing periods for Title III cases, Judge Swain had approved attorneys' and advisors' fees for about $360 million.

Last week, during the October general hearing, Swain approved another $35 million in fees for the sixth billing period (covering February and May 2019), following Williamson's recommendations.

Lawyers and advisors to the Board, the government, and creditor committeeswill  bill their fees in approximately three months.


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