Friday, May 24, 2019

[Editorial] Ticking Time Bomb RSA

By on May 9, 2019

Puerto Rico electric bill hike may force our grandchildren back to the stone age

Editor’s note: The following was first published in the May 9 – 15, 2019, issue of Caribbean Business.

When is an agreement not an agreement? When it is a restructuring support agreement (RSA) among the various creditor constituents holding Puerto Rico Electric Power Authority (Prepa) debt. The $9 billion owed by the ruptured cash cow belongs to retail bondholders, fuel-line lenders and monoline bond insurers on the hook for billions, all of whom have lived through too many forbearance agreements and two previous RSAs—all to recoup what little value of their paper they may.

In two previous incarnations of term sheets under previous Prepa RSAs, the sticking point always came down to the math in transition rates underpinning bond exchange formulas—when looked at closely, the rates always blew to unsustainable levels.

The first RSA struck by Prepa’s restructuring brigades, bondholders, fuel-line lenders and bond insurers in 2016 was ultimately rejected by the wise men and women sitting on the Financial Oversight & Management Board (FOMB) due to errant math in electricity-rate projections.

Navigant, the energy-consulting firm crunching those numbers, based their rate case on 2014 population figures—the mass exodus of some 64,000 people that year and each of the following two years from the island, heading for less trying jurisdictions—exposed electricity rates that would have skyrocketed by more than 25 percent not too far afield. Not good.

In those days, you had nearly 70 percent of the creditor constituents on board, which would have taken the accord to Title VI of the Puerto Rico Oversight, Management & Economic Stability Act (Promesa), where you could bind the holdouts for a final agreement. It was not to be.

Important creditors and Gov. Ricardo Rosselló’s restructuring squad are telling all who will listen that RSA 2.0 is different because it has the FOMB’s Good Housekeeping Seal of Approval. Never mind that under the most recent RSA you have a razor-thin majority of 51 percent of the creditor constituencies on board; that is a far cry from what you had under Prepa RSA 1.0 struck in the dawning of the age of Promesa back in 2016—where you had nearly two-thirds of the creditors on board in an RSA that one of Promesa’s founding fathers, Rob Bishop (R-Utah), thought was ironclad because he codified it into law. Ask Bishop how that went.

But that is only a small detail. The OBoard insists that under Title III it will not matter that the fuel-line lenders and the monoline bond insurers National and Syncora are not onboard. Instead, those who support the RSA are touting the bond exchange, which includes a swap of their power revenue bonds for two types of securitizations. Series A bonds will comprise about 67.5 percent of the value of the existing bonds while Series B bonds will be growth bonds linked to the island’s economic recovery and the repayment of the Series A bonds. The repayment of the bonds will be backed by a fixed transition charge on customers’ bills that would start at 1 cent per kilowatt-hour (kWh) in July, increasing to 2.768 cents per kWh upon closing and increasing thereafter to 4.552 cents per kWh during the 40-year maturity of the bonds.

So, the four-and-a-half-cent increase will take place so far down the road that we the people will not feel it, although our grandchildren may be forced back to the stone age.

Advisers with knowledge of the details behind Prepa’s transformation told Caribbean Business that an essential component of the utility’s most recent attempt to restructure debt hinges on greater efficiencies achieved through privatization of the utility’s assets. This includes deals struck with natural gas suppliers who have agreed to significant discounts worth nearly $180 million—nowhere in the Title III world is that expected. According to sources, “they understood that the contract in the context of the IRP, would render the deal as not viable; if they did not do that—it would be a nonperforming contract for Prepa.”

¿Y los renewables pa’ cuándo?

How altruistic of the natural gas companies to enter into agreements at such affordable rates. What we should be asking ourselves is whether they will show such kindness a decade down the road when the time comes to renegotiate those contracts. Will we be anywhere near the renewable energy goal of 50 percent renewables in our baseload by then? These are important questions to ask now, lest the people and the business community be blown to smithereens by the ticking time bomb of unaffordable energy in a not-so-distant future.