Tuesday, September 17, 2019

Promesa’s Cracker Jack Surprise

By on August 28, 2019

Editor’s note: The following was first published in print, in the Aug. 29, 2019, issue of Caribbean Business.

As pertains to the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), the value of the law is in the eye of the bondholder. If you ask the government, the defaulters-in-chief will tell you that Title III is of tremendous value because it provides a mechanism for bankruptcy-like proceedings to restructure the towering debt owed to numerous creditor constituents. As the law was being drafted, there were even some creditors who saw the most usefulness in Title VI, because it contained mechanisms to achieve consensual deals—something like consensual action clauses—that could bind holdouts in complex deals managing to bring 70 percent of the creditors on board.

Such was the case in a deal involving the Puerto Rico Electric Power Authority (Prepa), whose nearly $9 billion in debt included fuel-line lenders, monoline bond insurers, ad hoc creditors and retail bondholders. For the monoline insurers, who were on the hook for more than $4 billion of the utility’s debt load, Title VI was the holy grail for the art of the possible. They saw the utility on the verge of sealing a deal when Bill Cooper—one of the drafters of Promesa, who was a senior staffer for then-House Natural Resources Chairman Rob Bishop—codified into law the first restructuring support agreement between Prepa and 70 percent of its creditors. Bishop’s legislative brigades thought they were off to Title VI to bind the holdouts. Surprise, surprise—no sooner did Ricardo “the departed” Rosselló take office than his advisers were taking a second crack at the deal, thus blowing it to smithereens. Yes, the titles in Promesa are like Cracker Jack boxes—a little surprise in every one.

Perhaps the biggest letdown has been in the timid use of Title V in Promesa, the one area of the law intended to bring economic development to Puerto Rico. That provision was to have enabled the fast-tracking of critical infrastructure projects. At one point late in 2018, Revitalization Coordinator Noel Zamot had put his Good Housekeeping seal of approval on a list of critical projects worth some $8 billion that were waiting to be green-lit by the Financial Oversight & Management Board (FOMB). However, much to Zamot’s chagrin, the Oboard changed the rules for certification midstream, forcing many investors to drop out of deals.

Sources with knowledge of the Title V process told Caribbean Business that the FOMBsters made a concerted effort to dismiss the Title V route for critical projects as a way to validate the Rosselló administration’s insistence on using the Central Office for Recovery, Reconstruction & Resiliency (COR3) as the entity responsible for certifying critical projects. Zamot, as you will recall, resigned in frustration.

Now, months after Zamot’s resignation, the Oboard is making public the certification of a $5.3 million expansion of the Fajardo Municipal Landfill as a critical project. The landfill, which serves nine municipalities in the northeast of Puerto Rico, is slated to overrun its capacity within the next three years. The expansion would increase that capacity to 20 years. Importantly, the Fajardo Landfill “has a 4-megawatt (MW) gas-to-energy operation, using special equipment that uses methane as fuel to generate electrical energy,” according to a statement released by the FOMB.

The energy produced is not the real hair-splitting item in the release, but rather that the FOMB is at long last utilizing Title V as it was intended. In the release, FOMB Executive Director Natalie Jaresko is quoted as saying: “The project complies with the fundamental criteria to be considered a critical project and addresses two of the island’s most pressing issues: the need to diversify energy generation and to tackle the solid waste management crisis.”

That Jaresko remains as the interim revitalization coordinator nearly six months after Zamot’s abrupt departure seemingly indicates that Title V is really not a priority at this time. Instead, the focus will be on overhauling Prepa and closing debt-restructuring deals when the Promesa sweepstakes kick back into high gear at the end of the 120-day stay imposed by Judge Laura Taylor Swain. What a crying shame to see economic development relegated to the back of the line, pushing Puerto Rico’s sustainable growth further away for yet another lost generation.