The lack of independence and of professional management as well as the reluctance of Ricardo Rosselló Nevares administration to endorse the Restructuring Support Agreement (RSA) that the governor sought to renegotiate are some of the reasons that the organized bondholders of the Puerto Rico Electric Power Authority (Ad Hoc-PREPA) and three municipal insurers presented before Judge Laura Taylor Swain when requesting a trustee for that public corporation and an increase in the electricity fare.
Barely two weeks after the Board applied for the protection of Title III of PROMESA for PREPA, the Ad Hoc-PREPA and three of the four municipal insurers that guarantee the public debt of the Island asked for the termination of the automatic suspension of litigation provided in PROMESA
If Judge Swain - who attends the Title III cases of the Island - so commands, the insurers will ask three remedies to Court. The first one, would put PREPA operations in the hands of a trustee. The second remedy would mean, for customers, a possible increase up to 3.5 cents for kilowatt per hour (kWh) in electricity bills, money that would be used to pay bondholders.
A third remedy would be that the Board compensates the Ad Hoc-PREPA group and the municipal insurers for having rejected the RSA and to give way to such agreement.
Lack of management capacity
“The dismissal of professional managers and executives in favor of political operatives represents a mismanagement that, itself, denies the proper protection (of bondholders rights)”, states the motion of the bondholders represented by the Houlihan Lokey firm and the National Public Finance Guarantee, Syncora Guarantee and Assured Guaranty insurers.
As stated in the claim, since the end of 2014, PREPA accessed liquidity to finance its operation and got rid of default and litigation because creditors lent money to pay the debt and committed not to exercise the rights they own according the deed and bond contract of the public corporation. In the same period, according to the motions, PREPA started its operational transformation under Alix Partners management.
In accordance to the appeal, the poor management of PREPA resulted in less reliable energy and partisan politics motivated decisions that today jeopardizes the collateral of bondholders.
When presenting their pleas, creditors stated that PREPA current budget involves a drop of 30% in the public corporation incomes, which would make repayment of debt more difficult.
Similarly, according to the motions, in Puerto Rico, the suspension of electricity service is 12 times higher than the average time without electric service in the United States, a trend that has continued according to PREPA reports until last April.
In the motions, bondholders accept that there are multiple challenges to attend. However, they said that the operational transformation and depoliticising process that started in 2014 resulted in progress for PREPA.
In their claim before Swain, bondholders added that Rosselló Nevares appointed for the Governing Board of PREPA members of his campaign team, described as “political allies”.
In a statement before the court, Ad Hoc-PREPA group advisor, Stephen Spencer, added that the Rosselló Nevares administration began to retract the agreement they sought to renegotiate. This, by not holding additional meetings or signing extensions to the RSA that would have allowed to continue the negotiation.
A different case
In their claim to Swain, PREPA bondholders assured that their complaint is different to other demands under PROMESA.
In other cases, where bondholders called for the automatic suspension to cease, the Court had to weigh to evaluate which of the parties would result more harmed: the Government or the bondholder.
But the creditors of PREPA pointed out that their litigation will not result in other complaints against the corporation and that they already face a default situation, while the fiscal plan contemplates that the public entity incomes will continue to drop. The estimates of PREPA and the Energy Commission point out that 3.5 cents kWh of the electricity rate should be used to pay their debt, buy the public corporation has not reviewed their fares for decades. The RSA contemplated a charge to those effects that would not be implemented after the rejection of the Board to the agreement.
In that sense, according to creditors, designating a trustee to maintain PREPA´s operation and increase the fare for the operation of the public corporation and the payment to the bondholders “would operate in the best interests of PREPA, its customers and creditors”.