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Today’s hearing at the House Subcommittee on Insular Affairs will see depositions from Governor Ricardo Rosselló, members of the OB, and bondholders. (Archive/GFR)
Today’s hearing at the House Subcommittee on Insular Affairs will see depositions from Governor Ricardo Rosselló, members of the OB, and bondholders. (Archive/GFR)

WASHINGTON – For the Oversight Board (OB) to be able to execute a general restructuring of the Puerto Rico Electric Power Authority’s (PREPA) obligations, including the rates and the plan to reduce service costs, their only recourse would be Title III of PROMESA, which established the judicial bankruptcy mechanism.

Thus it is emphasized in the written statement submitted by Ana Matosantos before the House Subcommittee on Indian, Insular, and Alaska Native Affairs, which she will read today, in representation of the federal Board controlling the Island’s public finances.

But since PREPA’s restructuring support agreement (RSA)—backed by 70% of the creditors—was originally signed before May 18 of 2016, PROMESA leaves the OB without the jurisdiction to question the sustainability of the debt as established in the agreement, according to Matosantos.

Besides, since Title VI—which allows for voluntary negotiations—is limited to the restructuring of the debt issued through bonds, Matosantos warned that, under this section, the OB would not be able to review other financial obligations included in the preliminary agreement—such as the debt with banks—, unless they turn to the bankruptcy court.

“In a Title III case, the OB could approve the implementation (of the agreement), as amended, which makes it possible for PREPA to address other contractual obligations that generate significant costs,” Matosantos pointed out.

Today’s hearing at the House Subcommittee on Insular Affairs will see depositions from Governor Ricardo Rosselló, members of the OB, and bondholders. The purpose of this hearing is to review the status of PREPA’s restructuring, just nine days before the most recent preliminary agreement expires.

“The Board has already alerted the Governor that they will approve an amended agreement to reflect better financial terms, including low transition costs, as required by the Governor in the negotiations,” Matosantos revealed.

Today’s session will allow OB Chairman José Carrión III to render a report before the Subcommittee, at a time when Congress is not talking about extending the stay on judicial litigations against the Government, which expires on May 1st. This draws the big decisions regarding the restructuring of Puerto Rico’s debt closer.

Some see PREPA as the model for the negotiation of voluntary agreements; others, as an example to go straight to bankruptcy court.

Carrión said in his written statement that in the nearly seven months since then President Barack Obama appointed the OB’s seven voting members—four of whom were picked from a list provided by the Republican leaders in Congress, including Carrión himself—, the Board has made “a lot of” progress.

For her part, Matosantos reported that a preliminary analysis conducted by the OB on PREPA’s draft fiscal plan, which they received on February 21, suggests that it would not enable a “comprehensive transformation, necessary for PREPA to review its electricity costs.”

Matosantos remarked that PREPA’s draft fiscal plan does not adequately address the need to implement institutional changes to its procedures, nor the problems caused by “outdated” technology and information systems.

“It does not entail enough savings in its operational expenses. It does not contain an ambitious plan to change its business model and replace the inherited assets that are inefficient with new ones, especially those related to the generation of electricity by way of public-private partnerships or projects sponsored by the private sector. The capital expense plan seems to be focused on the maintenance of the facilities they already have,” claimed the OB representative and finance expert.

Matosantos, a Puerto Rican who was California’s State Finance Director, stated that “the preliminary RSA increases the electricity costs, which increases the cost of living and doing business in Puerto Rico.”

“This will make it harder to reverse the negative economic trajectory, which has largely led Puerto Rico’s budgetary crisis and threatens the well-being of the Island’s residents,” Matosantos added in the testimony obtained in advance by El Nuevo Día.

The preliminary agreement between PREPA and the Ad Hoc-PREPA bondholder group—one of whose representatives will be speaking today on behalf of Franklin and Oppenheimer’s investment funds—allows for a 15% reduction to the debt principal of uninsured bondholders. However, no reduction is provided in the case of insured creditors, because although those bonds would also see a principal reduction, the municipal insurers would pay the difference to the bondholders and would then seek to recover those amounts from PREPA.

Unlike a regular public debt renegotiation, the process conducted by PREPA included credit lines approved by several banks for fuel purchases. Including the bank debts, and with no changes to the original RSA, the relief on the debt’s principal would be reduced to only 8%.

This could mean that PREPA would be left with too high an annual payment for the bondholders, in relation to the three-quarters cutback proposed by the Oversight Board for other Government agencies, included the general obligations prioritized by Puerto Rico’s Constitution.

The agreement also involves an increase of almost 4 cents per kilowatt of electricity, a proposal that the Puerto Rico Energy Commission reduced to 3 cents.

According to the draft fiscal plan received by the Board, the agreed terms would leave, as of 2024, a debt service greater than the current amortization established for PREPA’s bonds. “The sacrifices made by the people of Puerto Rico and other creditors, as required by the implementation of the certified fiscal plan, are much greater than those required from PREPA’s creditors,” Matosantos acknowledged.

Rendering Accounts

In his written testimony, Carrión III explained the work done by the federal Board up to this point, and he upheld that the certified fiscal plan seeks to balance Puerto Rico’s governmental budget in three years.

Carrión stated that the plan’s objectives also include “providing adequate financing for essential services, maintaining the solvency of the government pension plans, restructuring the Government’s long-term debts and obligations, and adopting the necessary structural reforms to restore economic growth and opportunities for everyone in Puerto Rico.”

The fiscal plan—based on the OB’s requirements—involves cutting expenses by $39.6 billion in a decade, reducing debt service by 78%, a 10% reduction in expenses from the public pension systems, and, if the cash issues are not resolved, reducing the workday for government workers and eliminating the Christmas bonus, among other things. The University of Puerto Rico would receive one of the hardest hits: it could lose up to $450 million, almost half the subsidy it receives from the Government.

“Reaching these objectives won’t be easy. The cuts are deep, and in some instances, they will be painful,” said Carrión, whose appointment was proposed by Speaker Paul Ryan, an office with whom he maintains direct contact.

In the hours before the hearing, conservative groups—which have usually identified with the lawsuits from big investment funds—have denounced the fiscal plan, claiming that it imposes debt service cutbacks that are too severe and do not do enough to reduce the Government's expenses.

First there was an article from Cato Institute. Yesterday, on The Hill, Andrew Langer—identified as president of the conservative Institute for Liberty—claimed that the Government has failed to promote voluntary negotiations with the bondholders. “The economic recovery plan certified earlier this month strongly suggests that Rosselló’s government will continue to default on creditors, continuing the policy of his predecessor: Alejandro García Padilla.”

Even though both the federal Board and Resident Commissioner in Washington Jenniffer González have ruled out that Governor Ricardo Rosselló’s petition to extend the stay on litigations will progress, Carrión insisted that they would search for voluntary restructuring agreements for the public debt over the next 40 days.

“Throughout the process, the Board has been strongly committed with the idea of addressing Puerto Rico’s financial crisis by ‘doing everything at once.’ That means establishing a series of public policy and debt restructuring changes to redirect the budget and the economy, at least in in terms of the expectations,” claimed Carrión, an insurance expert.

Meanwhile, Carrión gave firm accolades to PROMESA, a bipartisan product created between the Treasury Department of President Obama’s Democrat administration and the Republican majority in Congress, led by Paul Ryan.

In that sense, Carrión claimed that “PROMESA was passed to build a path towards economic stability, economic growth, an equitable restructuring of the Government’s debt, and to re-establish access to the capital markets.”

He highlighted that “without the bipartisan legislation PROMESA, the Island would be facing financial and legal chaos right now, without any hope to turn around its economic decline, and the sad exodus of more Puerto Ricans in search of a prosperous life for their families.”