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Puerto Rico’s power utility creditors ask court to appoint receiver

By on July 18, 2017

SAN JUAN – Creditors of the Puerto Rico Electric Power Authority (Prepa) seek to lift the Promesa law’s stay and appoint an independent receiver for the utility to oversee certain operations of the public corporation and which could result in increased rates.

The motion, which has more than 1,000 pages, was filed Tuesday by National Public Finance Guarantee Corp., the Ad Hoc Group of Prepa Bondholders, Assured Guaranty Corp. and Syncora Guarantee Inc.

They seek to enforce their rights after the island’s financial oversight board rejected Prepa’s deal to restructure its roughly $9 billion debt.

“As PREPA’s single largest creditor, we worked tirelessly for several years with all stakeholders on a comprehensive restructuring that the Oversight Board forced off the table in violation of PROMESA. As a result of the default precipitated by the Oversight Board’s unlawful action, we now have little option but to enforce our legal and contractual rights, and to ensure PREPA sets rates and charges that are sufficient to meet its financial obligations,” stated Bill Fallon, CEO of National, a bond insurer with exposure to Prepa.

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He added that given the utility’s most recent actions and its “lengthy history of mismanagement and cronyism and the inherent conflicts of interest ignored by the Governor and the Oversight Board, an independent receiver will provide much-needed protection for PREPA, the citizens of Puerto Rico and its creditors.”

The motion comes a day after National and Assured amended a complaint they filed in June, in a separate process in U.S. district court against the fiscal board.

Back then, the insurers sought an order, or mandamus, to force the certification of Prepa’s restructuring support agreement (RSA), which had failed to get the board’s support as a qualifying modification under Title VI of Promesa.

On Monday, the insurers modified their complaint to instead have the court declare that the RSA was a “preexisting voluntary agreement” as defined by Promesa—and thus had to be certified—and that the board’s failure to approve the RSA was unlawful under the federal law.

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Prepa has more than $8.3 billion of bonded debt as well as approximately $700 million currently due under two lines of credit used by Prepa to pay for the purchase of fuel, the suit says.

With a total exposure of over $2.3 billion to Prepa, National and Assured said they hold or insure approximately 25% of the utility’s total outstanding debt and are significant stakeholders “that want the utility reformed into a modern, sustainable, and successful power authority.”

In December 2015, Prepa and the vast majority of its creditors agreed on a restructuring blueprint, the only deal of its kind agreed upon before Promesa became law in June 2016.

Congress acknowledged that fact and grandfathered the RSA, singling it out for fast-track approval under the consensual resolution provisions of Promesa’s Title VI, the bond insurers argue.

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But once a new administration came into office early this year, the commonwealth and Prepa creditors agreed in April to renegotiate the existing deal.

“The supplemented RSA maintained the structure and main features of the original deal, but it provided additional and significant relief to Prepa that effectively would have resulted in the reduction of the per kWh [kilowatt-hour] rate charged by Prepa to consumers. Prepa submitted the supplemented RSA to the Oversight Board on April 28, 2017 for certification and implementation under Title VI of Promesa,” the insurers say.

Since Congress intended to preserve the RSA as the only preexisting voluntary agreement, it provided for expedited certification of the RSA under Promesa, without the need for substantive review and evaluation by the board, according to the monolines.

They add that “overstepping its statutory authority under Promesa,” the board rejected the RSA.

“By rejecting the RSA, the Oversight Board deprived Prepa of the critical liquidity provided to Prepa under the RSA, which Prepa desperately needed to service its debt obligations, including a payment of principal and interest maturing on July 1, 2017 and due to be paid on July 3, 2017,” the suit says.

Prepa filed for bankruptcy under Title III of Promesa on July 2. The following day, U.S. Bank, the utility’s trustee, notified Prepa’s creditors of certain events of default that have occurred under the trust agreement, including failure to make payment of more than $450 million in principal and interest that was due July 3.

“The clock is ticking on Prepa’s restructuring, and Puerto Rico cannot afford to endure a PREPA bankruptcy that could turn the lights off,” the insurers stated.

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