On July 2, 2017, Puerto Rico’s Fiscal Agency and Financial Advisory Authority announced that the island’s troubled power authority defaulted on a deal to restructure roughly $9 billion in bond debt and sought protection from its creditors.

Power Authority Files for Bankruptcy

The government said the move to file for bankruptcy was the only way to reduce the existing debt of Puerto Rico Electric Power Authority (PREPA) “to a sustainable level.” PREPA had previously negotiated an out-of-court deal to reduce its bond payments by about 15 percent. The bondholders now seem likely to sustain larger losses under court supervision.

The out-of-court deal called for PREPA to continue paying down its remaining debt by adding an unpopular increase to power customers’ monthly bills. The deal also required the restructured debt to be secured to an investment grade rating, an insurmountable challenge with the island’s government itself effectively bankrupt and its economy in a painful decline.

The Oversight Board, created by the Puerto Rico Oversight, Management and Economic Stability Act that is guiding the island’s finances, voted not to extend the consensual deal any further paving the way for the move for court protection.

Electrical power has long been a drag on the island’s economy. Efforts to modernize the plants and shift to clean and renewable fuels have been delayed repeatedly with accusations that PREPA’s fuel purchasing office for many years bought dirty oil sludge as fuel and charged consumers the much higher price of cleaner distillates and then created a slush fund with the difference. Puerto Rico’s Senate held a series of hearings on PREPA’s fuel purchasing irregularities and has referred its findings to the Federal Bureau of Investigation.1

On June 27, 2017, Assured Guaranty, Ltd, a bond insurer called for presidential intervention in its dispute with the Oversight Board saying the Board went too far when it approved bankruptcy protections for PREPA. Assured Guaranty said in a statement that either President Donald Trump or the U.S. Congress must act to “restore the rule of law,” claiming the Oversight Board exceeded its authority by rejecting the pre-existing $9 billion restructuring deal.2

Developments in the Commonwealth of Puerto Rico Bankruptcy

As previously reported, the Oversight Board on May 3, 2017 placed the Commonwealth of Puerto Rico into federal bankruptcy court.3

The judge in Puerto Rico’s landmark bankruptcy shot down a proposal to appoint fiduciary agents to represent warring creditors in debt restructuring talks.

On June 28, 2017, Judge Laura Taylor Swain at a hearing in San Juan denied the proposal by the Oversight Board giving credence to concerns of some creditors that the Board cannot be objective in certain investor disputes.

A major clash is between the island’s general obligation bond investors and the investors of the sales-taxed bonds called Cofinas, both claiming seniority in a restructuring.

The Board had proposed appointing agents to advocate for each side in settlement talks, but the plan would have given the Board a hand in selecting the agents. This upset the holders of the Cofina bonds who believed the Board planned to side with the general obligation creditors and feared the Cofina agent would not be independent.

Judge Swain raised similar concerns. “Maximizing the return for Cofinas might get tied up in the notion that Puerto Rico needs to be healthy in [later] years, and is not solely a question of grabbing everything that’s on the table,” Swain said, instructing sides to confer on a new approach.

Separately, federal Judge Barbara Houser, who is leading a team of mediators in the Puerto Rico’s bankruptcy, set an initial meeting with the Commonwealth and its creditors for July 12 in New York. Judge Houser said the meeting would be introductory, not substantive, and would be mandatory for all stakeholders.

Judge Houser said the mediation could save time and money in the case.4


Endnotes

  1. Walsh, Mary Williams, “Puerto Rico’s Power Agency Defaults Over Debt,” The New York Times, July 3, 2017.
  2. Archer, Rick, “Bond Insurer Wants Trump To Intervene In Puerto Rico Case,” law360.com, July 5, 2017.
  3. Peluso, Romano I., “Puerto Rico Files For Bankruptcy Protection,” Perkins Coie LLP, corporatetrustinsider.com, May 8, 2017.
  4. Brown, Nick, “Puerto Rico judge nixes negotiation plan in debt battle,” reuters.com, June 28, 2017.