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Bond insurer warns Puerto Rico electricity subsidies will lead to ‘isolation’

By on August 17, 2017

SAN JUAN — Assured Guaranty is urging the commonwealth and the Financial Oversight & Management Board to stop ignoring Puerto Rico Electric Power Authority’s (Prepa) financial obligations and warned that providing below-cost energy to subsidize special interests is “misguided” and would lead to “financial isolation.”

The Bermuda-based bond insurer is one of several creditors that has sought to put Prepa in receivership to pave the way for a rate increase that can pay for the utility’s debt obligations after the collapse of a restructuring support agreement (RSA) four years in the works. Assured also insures general obligation bonds and those of other instrumentalities such as the Highways & Transportation Authority.

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Assured’s president and chief executive officer, Dominic J. Frederico, called upon the Fiscal Agency & Financial Advisory Authority (Fafaa), Prepa and Gov. Ricardo Rosselló to “heed the situation in Venezuela today,” reminding them that the federal Promesa law calls for Puerto Rico to achieve fiscal responsibility to be able to regain access to capital markets.

“Unfortunately, the Commonwealth’s and Oversight Board’s attempt to ignore Prepa’s standing as a public corporation with explicit legal obligations, and instead use it as a tool to provide below cost electricity to subsidize the general welfare and prosperity of island special interests is misguided and a direct precursor to further financial isolation.

“Such approach will undermine the prospects for any privatization partnerships Prepa may seek in the future. Rather than present a path to Statehood, prosperity, or achieving Promesa’s goal of fiscal responsibility and access to capital markets, we see a path of increasing isolation, crisis and instability if more prudent and responsible measures are not promptly taken,” Frederico said in a letter addressed to Fafaa Executive Director Gerardo Portela, dated Aug. 16.

Frederico’s letter was in response to an Aug. 4 letter from Portela, rejecting Assured’s request for an increase to energy rates paid by customers so the utility can pay its creditors.

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The monoline executive rejected Portela’s claims that Prepa does not set its own rates. While under current law the Puerto Rico Energy Commission (PREC) has the final say on electricity rates, he noted that under applicable law, the public utility must request establishing rates that are sufficient to pay its debt service and other costs.

Frederico also reminded Portela that the PREC previously approved a 3-cent transition charge that would have provided sufficient funds to pay restructured debt service. A rate hike that was slated to go in effect in July was postponed until October, a decision that Frederico said was promoted by the administration of Gov. Rosselló.

With respect to remarks Portela made that the rate hike was inconsistent with Prepa’s fiscal plan, Frederico said the utility’s plan uses the projections and capital structure of the now-defunct RSA as a foundation for its financial forecasts. While the fiscal board rejected the agreement that would have restructured Prepa’s roughly $9 billion in debt, he said it did not reject the transition charge approved by the PREC to be used to pay for the debt restructuring.

In that regard, Frederico urged the Rosselló administration to urge the board to overturn its decision to reject the RSA.

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The insurance executive also called as misleading Portela’s contention that Prepa was not created as an independent corporation to justify not raising rates.

“Prepa’s enabling act specifically creates Prepa as a body corporate and politic consulting corporation,” Frederico said. “The purpose of a public corporation is to be independent in credit and corporation from the related host government that established the public corporation,” he added.

The Ad Hoc Group of Prepa Bondholders, National Public Finance, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and Syncora Guarantee Inc., which hold about 65 percent of the public utility’s debt, recently asked Judge Laura Taylor Swain last month to lift Promesa’s stay on litigation so they could sue in court to have Prepa put into receivership.

During the omnibus hearing held Aug. 9, Judge Swain reserved her decision on whether the stay should be lifted so that Prepa could be placed under receivership and increase rates to cover all of its obligations.


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