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Muni Week Review / Preview 7/19/2017

Wednesday, Jul 19, 2017


Puerto Rico’s bondholders and insurers asked a Federal judge to allow the government’s electric company to be placed in the hands of an independent receiver, seeking to strip control from political appointees they say have failed to push through rate increases needed to repay its bondholders.

Puerto Rico Bondholders Seek Receiver for Electric Company…
Creditors holding or insuring more than $5.3 billion of Puerto Rico Electric Power Authority (PREPA) bonds, about 65% of the total, filed a motion Tuesday seeking a receiver for PREPA. The filing comes after the Federal Board tasked with overseeing the Island’s finances rejected a restructuring agreement the authority reached with creditors in 2015, opting to steer it into bankruptcy instead. The utility on July 3 failed to pay investors more than $400 million of principal and interest, marking its first payment default.

PREPA supplies most of Puerto Rico’s electricity and has struggled to renovate an aging system that relies on oil to produce electricity. After two years of negotiations and being approved by two Puerto Rico Governors and legislatures, the Federal Board last month nixed the restructuring deal between PREPA, hedge funds, bond insurers and mutual funds, saying it failed to adequately ensure that Island residents would be protected from rate increases.

The creditor filing stated, in 2014 the then president of the Puerto Rico Senate Eduardo Bhatia suggested that PREPA kickbacks amounted to nearly $300 million in just one year. A class action lawsuit filed in February 2015 alleged the heads of PREPA’s fuel procurement office and other PREPA employees violated the Racketeer Influenced and Corrupt Organization Act (RICO) and engaged in a kickback scheme with oil suppliers and testing labs defrauding PREPA rate payers of multimillions of dollars.

An outside firm would improve the utility’s finances, implement a long term infrastructure plan and address PREPA’s accounts receivables, the creditor group said in its court filing. The creditors include a group of hedge funds and mutual funds, as well as Assured Guaranty Ltd units, MBIA National Public Finance Guarantee Corp and Syncora Guarantee.

“PREPA pledged its revenues, and covenanted that it would maintain rates at levels sufficient to cover certain operating expenses and debt service on the bonds,” according to the court filing. “Further giving effect to this pledge, the Authority Act provides for the automatic appointment of a receiver in the event that PREPA fails to meet its obligations.” A hearing on the receiver request is set to be held August 9 in San Juan, according to court documents.

Assured Guaranty said the receiver would ensure the lien granted to PREPA bondholders and their insurers as part of their collateral package produces net revenues in amounts sufficient to timely pay debt service on bonds. National Public Finance Guarantee said today’s motion seeks to lift the stay under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) so creditors can enforce their rights following the payment default by PREPA earlier this month.

Yennifer Alvarez, a spokeswoman for Governor Ricardo Rosselló, and Elliot David, a spokesman for the Island’s Fiscal Agency and Financial Advisory Authority, which is managing PREPA’s restructuring, didn’t immediately respond to emails and phone calls.

Multiple governors from the Island’s two main political parties have filled the utility’s top positions, regardless of experience. Lisa Donahue of AlixPartners International, who served as PREPA’s chief restructuring officer from September 2014 through February 2017, told Island lawmakers during public hearings on PREPA, a receiver would have the ability to fire employees and remove political appointees.

“A receiver would take action to reduce costs and other expenditures, improve productivity, and increase revenues without the chronic mismanagement and politicization that PREPA currently faces,” lawyers for the creditors wrote in court documents. Puerto Rico law and bond agreements allow for PREPA to be placed into receivership in the event of a default if holders of at least 25% of the outstanding debt agree to such a change. The group’s holdings easily surpass that requirement.

Bondholders and the insurers on the hook for much of that debt asked U.S. District Court Judge Laura Taylor Swain to allow them to seek a receiver in another court. Because PREPA is in bankruptcy under an emergency rescue law, creditors cannot sue without Swain’s permission.

Bondholders made a similar request in the bankruptcy of Jefferson County, Alabama, which was forced to seek court protection because of debt related to its troubled sewage treatment system. In that case the judge put off ruling immediately, which eventually put pressure on the county to settle with bondholders.

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Information obtained from sources deemed reliable; GMS does not purport Review/Preview contains all available information.