The Government announced yesterday that the Puerto Rico Electric Power Authority (PREPA) and its creditors had reached preliminary understandings with respect to the changes to the Restructuring Support Agreement (RSA) in effect, that increase from five to eight years the moratorium on the payment of the debt’s principal, but maintains at 15% the reduction on that obligation.
When conveying what he called an “agreement in principle,” Governor Ricardo Rosselló estimated that the new terms of the RSA would entail savings of $2.2 billion in debt service payments between 2018 and 2022, as compared to the original conditions. Likewise, he indicated that the changes would represent an additional $1.5 billion in savings with respect to what the past administration negotiated with Lisa Donahue, of AlixPartners International.
Rosselló also said that the revised agreement would result in savings in the transition charge for PREPA customers, of 36% for the period between 2018 and 2022. This means that the US$0.0310 cents per kilowatt hour (kWh) approved by the Puerto Rico Energy Commission (PREC) would now be of $0.0198 cents per kWh. Collection of this charge would start once the PREPA is able to achieve the bond issue under the securitization mechanism, which has been put off since late last year.
Although the transition charge entails an increase in the electricity rate, Rosselló said that with the new terms, customers will see, on average, an annual reduction of $90, for five years, in their bill. In other words, the rate hike would be less than projected.
The official communication sent by La Fortaleza sheds not light on what would happen after 2023 with the savings in debt service payments, or the reduction in the transition charge. Voices outside of Government warned, however, that both things could just disappear into thin air.
La Fortaleza did make clear that the terms of the agreement are under review, but have not been approved by the Oversight Board (OB). PREPA’s Governing Board has also not endorsed them, so that they are not final.
In order to provide enough time to “complete the required documentation,” the RSA was extended until next Thursday, April 13. During this time, validations by the OB and the PREPA Governing Board should be obtained.
The PREPA creditors who participated in the negotiations were the Ad Hoc Group of Bondholders, the providers of the lines of credit for fuel, the municipal insurers, and the Economic Development Bank. The PREPA was represented by the Fiscal Agency and Financial Advisory Authority (FAFAA).
Rosselló held that the changes are designed to allow PREPA to take the “necessary steps” to modernize its operations and implement his administration’s public energy policy. This public policy includes the attraction of new private investment, mainly for generation, and the public-private alliance programs.
“You might recall the notion, through various sources, that the previous agreement could not be improved, that it was the only alternative for Puerto Rico, and we insisted on negotiating in good faith. We have reached those agreements and, not only were the savings obtained but the impact to the consumer is almost 40% less,” said Rosselló from the Pan American II Pier in San Juan, where he announced an agreement with a cruise line.
“(The new RSA) is linked to an ordered transition in the operation of PREPA, for it to be not only a financial agreement, but so that we may also make the necessary changes in terms of generation, transmission, and of all of its structure. We have reached an agreement in less than 100 days, and when compared to the agreement made by Lisa Donahue, the dozens of millions of dollars invested on it, and which brought no results, we have an additional savings of $1.5 billions for the people of Puerto Rico,” he added.
For his part, the executive director of FAFAA, Gerardo Portela, commented that the transaction represents “the first step in the comprehensive restructuring” of Puerto Rico’s debt, which stands at around $69 billion. He noted that the office was advised by Rothschild & Co., as financial advisor, Bank of America Merill Lynch, as investment bank, and Greenberg Tauring, as legal counsel.
The executive director of PREPA, Ricardo L. Ramos, referred a petition for an interview to the FAFAA.
Meanwhile, the president of the Governing Board of the public company, Luis Benítez, limited himself to congratulating the governor and his team, “because our north has always been to improve the agreements.”
He added that the changes announced yesterday were possible “thanks” to the new Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA), which provides additional negotiation tools.
Sources of El Nuevo Día close to the transaction highlighted as an “achievement” that the new terms of the RSA were agreed –albeit preliminarily– before May 1, when the stay on litigations associated with Puerto Rico’s deb expires, according to that provided for in PROMESA. Had it not been that way, PREPA would have been exposed to collection suits and, ultimately, in the OB invoking Tittle III of PROMESA, which establishes a territorial bankruptcy procedure.
“Postpone the Blow”
In the opinion of economist Vicente Feliciano, what the announcement made yesterday does is to “postpone the blow” to the pockets of consumers, because the life of PREPA’s debt was extended but its reduction remained unchanged with respect to the original agreement.
“If no change was made to the reduction or the interest rate, what the agreement does is to postpone payments. The blow is not being lessened,” said Feliciano.
In agreement with him was Tomás Torres, coordinator of the Puerto Rico Institutefor Competitiveness and Sustainable Economy (ICSE), who said that “postponing payments brings no relief, it solves nothing.” He insisted on the reduction of the debt being “much bigger,” for rates to go down and for there to be economic growth.
Feliciano and Torres denounced, also, that the Government has not been sufficiently transparent in revealing the new terms of the RSA. Both reacted only on the information given in a press release, as no other official document was made available.