PREPA bond party experts challenge board’s economic assumptions

Puerto Rico Electric Power Authority bond parties presented the court with written expert testimony supporting their claim the Oversight Board’s proposed plan of adjustment assumptions underestimate Puerto Rico’s economic future and overestimate PREPA’s future expenses.

The testimony could impact U.S. District Court Judge Laura Taylor Swain’s ruling on the plan, according to an attorney not involved in the bankruptcy, since they “presumably will be part of the record supporting whatever opinion she issues.”

The testimony is intended to be part of the bond parties’ fight against the board’s proposed plan of adjustment and create a record for appeal, according to an attorney who represents one of the bankruptcy parties.

But, given previous rulings by Swain in the case, despite highlighting “substantial problems” with the board’s assumptions, Puerto Rico Clearinghouse Principal Cate Long said, “I expect Judge Swain to also dismiss them in her analysis.”

“No matter what evidence is presented to Judge Swain, she will not rule in favor of bondholders,” said a lawyer not involved in the case. 

The attorney in the bankruptcy said the bond parties will file other declarations by Tuesday that might be more important than those already filed.

The board’s economic outlook model supporting its proposed plan of adjustment is overly pessimistic, said Sebastian Edwards, professor of business economics at University of California at Los Angeles. It forecasts an economic decline of “unprecedented length,” lowering the amount of revenue PREPA has available to pay bondholders, he said.

In fiscal 2022, the latest year where data is available, Edwards said, inflation-adjusted growth of 3.7% was nearly double the 2% growth the board had projected.

The Puerto Rico Planning Board projects “significantly higher growth” in real GNP through fiscal 2033 than does the Oversight Board, Edwards said.

The board’s projections “relies on historical correlations that are unlikely to persist,” and omit a “key economic driver.” The professor said his model projects positive economic growth for the island for the next 30 years.

Michael Yackira, former president of investor-owned electric utility NV Energy, said the Oversight Board overestimates PREPA’s future expenses since they are larger than what is expected for the electrical industry as a whole and “inconsistent” with board expectations that there will be decreased electric demand.

Also, the Oversight Board apparently fails to include cost savings from PREPA’s transition to private operators of its generation, transmission, and distribution system, Yackira said, or the use of Federal Emergency Management Agency funding.

Actuarial and employee benefits consulting and research firm Terry Group CEO Thomas Terry disputes the size of the pension claim against PREPA, pegging it at $2.65 billion, compared to the $3.848 billion the Oversight Board estimates.

The board’s expert’s study on pensions “does not comply with the requirements associated with actuarial services,” he said.

Managing director of TM Capital Group Robert Grien’s report noted the plan offers widely different financial values to bond parties.

The opposing bond parties submitting the expert testimony were the PREPA Ad Hoc Group, Assured Guaranty, bond trustee U.S. Bank N.A, Syncora Guarantee, and GoldenTree Asset Management.

The Puerto Rico Oversight Board declined a Bond Buyer request for comment.