Scuttling the Prepa RSA: Promesa’s Not So Happy First Birthday
Happy Birthday to you, Happy Birthday to you, Happy Birthday dear Promesa—Happy Birthday to you. Yes, the bill conceived by U.S. Rep. Rob Bishop (R-Utah) and delivered by Speaker of the House Paul Ryan (R-Wis.) turned a year old last week and the last thing those powerful members of Congress were expecting was that their child would become an enfant terrible prior to reaching the age of two. Foremost among their concerns is that the Puerto Rico Oversight, Management & Economic Stability Act (Promesa) failed to seal the restructuring support agreement (RSA) struck between the Puerto Rico Electric Power Authority (Prepa) and its various creditor constituencies.
When they were amending the bill before its passage in Congress, the last thing Bishop expected was that Gov. Ricardo Rosselló’s administration—in those days considered the second coming of Argentine President Mauricio Macri—would take another crack at the deal. But the Rosselló administration went back to the negotiating table and in one fell swoop tossed the prearranged status of the Prepa RSA into the trash. To make matters worse for Republicans on the Hill, who now feel betrayed, the members of the oversight board failed to certify the RSA and, in the process, blew the deal to kingdom come at the stroke of midnight on June 29.
As this newspaper was going to press, National, a bond insurance company that holds Prepa debt and certain Prepa bondholders, offered to relend money to the utility to pay the bond debt that was due on July 1. It would have mirrored the mechanism employed in July 2015 when a relending helped make a bond payment that was due in a move that helped extend the RSA that was struck in the years of former Chief Restructuring Officer Lisa Donahue. That deal was extended on 18 occasions prior to its most recent reincarnation under Rosselló.
National is on the hook for some $1.8 billion of Prepa’s $9 billion debt load; it was in their best interests for them to lend cash that would have helped the deal remain alive to fight another day. But the Rosselló administration rejected the offer—it was not an offer they could not refuse. The question is why?
Apparently, there are competing interests upon competing interests in a layer cake for a marriage made in Hell. Those supporting the Prepa deal include institutional bondholders, hedge funds that would have made out like bandits, fuel line lenders and bond insurance companies National, Assured and Syncora that are on the hook for nearly $3 billion in Prepa debt.
Wall Street sources who spoke to this newspaper on the condition of anonymity insist the board feigned negotiation, but never had the true intention to see the agreement through. The deal would have allowed those holding Prepa debt to exchange their debt for securitized bonds in what amounts to haircuts ranging from 15% for some—not bad, when you compare it to the throttling that most Puerto Rico bondholders are likely to face under Title III bankruptcy proceedings.
The most recent Prepa RSA had to be certified by the oversight to head down a path to Title VI for consensual negotiations, which would have bound the holdouts that amount to some 30% of the utility’s bondholders. But there was resistance among those on the board—Andrew G. Biggs, Arthur J. González, Ana J. Matosantos and David Skeel oppose the deal in part because they see a potential crushing electricity cost coming down the pike.
The board’s conventional wisdom is now being battered by category five winds; Bishop and Ryan are howling down on these mambo tropics, say sources on the Hill. The solons on the Hill claim that by scuttling the RSA, Puerto Rico has lost all credibility and has pushed access to capital light years away. That is investment essential for Puerto Rico’s overhaul of its broken utility.
There is a movement afoot being pushed by other interest groups that would rather see the utility privatized. However, there are covenants in the Prepa bond documents stating that bondholders have a lien on Prepa cash flows. With the scuttling of the RSA, there will be massive litigation costs and lawyers will make a killing. The question is: “Who will invest in a utility headed for a shootout at the OK Corral?” Once again, the affordable electricity that everyone alleges to seek will remain elusive and Puerto Rico will fail to achieve sustainable economic development for the foreseeable future.