Eight years down and no end in sight: PREPA’s long bankruptcy

The factors that have kept the Puerto Rico Electric Power Authority bankruptcy going for eight years may extend it for several more years, observers and participants say.

The bankruptcy has dragged on about 75% longer than the previous record holder for a U.S. municipal bankruptcy, San Bernardino, Calif., which lasted about four years and seven months from filing to exit.

Restructuring discussions between creditors and PREPA began in the summer of 2014. The Puerto Rico Oversight Board, under terms of the 2016 Puerto Rico Oversight, Management and Economic Stability Act, put PREPA into Title III bankruptcy in July 2017, two months after the commonwealth government.

Puerto Rico’s central government exited bankruptcy in 2022.

In the latest deal the Oversight Board offered, non-consenting bondholders would get cash equal to 3% to 3.5% of the net present value of their claim. They estimate at least $12.16 billion of debt is due, including principal and pre- and post-petition interest.

A group including BlackRock would get 12.5% of par as recoveries with possible additional money depending on the circumstances of the bankruptcy resolution.

A tiny fraction of retail bondholders would be paid 50% of principal.

The board is offering about $2.6 billion to all creditors, which includes others besides bondholders but doesn’t include the pensioners.

Observers variously cast blame on Puerto Rico politics, bankruptcy judge Laura Taylor Swain, the board, the bondholders, technological change and other factors for the PREPA bankruptcy’s extended duration.

“The bankruptcy has gone on so long because of the politics and the populism,” said Joseph Krist, publisher of Muni Credit News. “Puerto Rico has always functioned more as a small country than as an entity fully connected to the U.S.”

Puerto Ricans have treated PREPA as much as a vehicle for providing jobs as a means of delivering electric power, he said.

“The pressure to hold rates down has been a constant,” Krist said. Puerto Rico politics has kept the authority “overstaffed and underfunded. There were always political impediments to running the system properly.”

Puerto Rico’s Fiscal Agency and Financial Advisory Authority contributed to the delay in resolving the bankruptcy by terminating the first negotiated restructuring support agreement in May 2019.

“It began a series of confrontations between bondholders, the board and PREPA that resulted in the First Circuit [Court of Appeals] reversing Judge Swain’s findings and derailing the plan of adjustment,” said Puerto Rico attorney and commentator John Mudd.

“Unlike other debt adjustment processes elsewhere, this one has become highly politicized due to Puerto Rico’s status conundrum,” said University of Puerto Rico Political Science Professor José Garriga Picó. “Moreover, PROMESA, the Oversight Board and their processes have allowed local politicians of all parties to shift responsibility for governance and economic policy. To wit, consider that, while local politicians criticize PROMESA constantly, they have done little to expedite its resolution.

“Those familiar with Puerto Rico know that transactions involving government agencies often take at least twice as long as similar processes in the mainland,” Garriga Picó said.

“There has always been a reluctance on the part of officials in Puerto Rico to accept suggestions from outside parties whether it be operations or finances,” Krist said.

The Oversight Board is far from blameless, he added.

“A lot of the time, it has looked like the Oversight Board holds the resolution of this in its hands,” Krist said.

“It isn’t clear to me why they haven’t been more supportive of a timely resolution. After eight years it is fair to ask if the board is part of the solution or the problem.” he said.

“The unelected [board] gives the bondholders fewer avenues to pressure for an agreement than would be the case for an elected political entity,” said Vicente Feliciano, president of Puerto Rico-based Advantage Business Consulting.

The Oversight Board in a statement said it hopes to bring the process to an end “as soon as reasonably possible.” It blamed the drawn-out process on natural disasters, COVID-19, the Puerto Rico legislature’s lack of support for the previous agreement with bondholders, and “delay tactics” by the non-consenting bondholders.

“The Oversight Board proposed a responsible plan that defines the treatment for all creditors and which has the support of 44% of PREPA’s creditors,” the statement said. 

The non-consenting bondholders insist on a recovery PREPA’s revenue can’t support, particularly given its dire investment needs, the board said.

“Given PREPA’s current condition, the Oversight Board does not believe there are, or likely ever will be, sufficient net revenues to satisfy the unrelenting claim by those bondholders who believe PREPA can pay them a full recovery with interest,” the board said. “Such a deal would help no one. It would bankrupt PREPA again.”

A professional at a party holding PREPA bonds, who declined to be identified, said while local politics had contributed to the slow resolution to the restructuring, the Oversight Board is primarily to blame. “It’s a willingness issue, not a financial issue,” the professional said. “We have settled this multiple times and the board has reneged multiple times.”

In the first deal the board offered to pay bondholders $7.3 billion in new bonds and now its offering $0 from PREPA. According to the board, any money for the utility’s creditors is to come from Puerto Rico’s government. “On its face, it’s absurd,” the professional said.

Electric rates on the U.S. Virgin Islands, Hawaii and other islands are from 40 cents to 50 cents per kilowatt-hour and Puerto Rico is arguing that it doesn’t want to pay rates in the 20s, the bond professional said.

The board is currently offering virtually zero to the bondholders and that ensures the only path ahead is litigation, the bond professional said. If the bankruptcy continues on the road to litigation rather than a negotiated settlement, it could run another two to three years, a second bond firm professional said.

Mudd said along with FAFAA’s misdeeds should be added “the court’s unwillingness to accept the fact that there was no chance for a settled plan of adjustment since the board refused to increase payment to bondholders.”

Swain has repeatedly said “failure is not an option” for the bankruptcy. She has suggested that dismissing the bankruptcy would lead to an unbridled struggle among all parties that wouldn’t benefit anyone. She has pushed parties since the start of the bankruptcy to reach a consensual deal rather than having her approve a cramdown, which she said would lead to lengthy litigation. In a cramdown a bankruptcy judge forces creditors to accept cuts to what they are owed beyond what they want.

Feliciano said bondholders are partly to blame because they “looked at the PREPA bankruptcy as a corporate legal and financial issue. It is in fact, also a social welfare and an economic development issue. Relatively poor U.S. citizens, who do not have access to a slew of U.S. welfare programs, stand to pay higher electricity bills.”

Further, increasing PREPA rates would harm prospects for economic and business development necessary for the island’s economic wellbeing.

Meanwhile, technology moves on from PREPA’s array of fossil-fuel generation plants and the storm-vulnerable power lines they feed.

“Solar energy in a Caribbean jurisdiction with high electricity rates is an attractive proposition,” Feliciano said.

The utility is becoming steadily more expensive to fix, due to inflation and the growing share of island residents and companies turning to solar, said Matt Fabian, partner at Municipal Market Analytics.

The utility’s plan to use unspent “obligated” Federal Emergency Management Agency money is a “less reliable long-term capital funding plan,” Fabian said.

The vastly different treatment the board has offered to a group of bond investment groups including BlackRock will not be in any approved plan of adjustment, the PREPA bond party’s second professional said. Any divergent treatment of creditors in the same situation must be legally justifiable and this isn’t, the professional said.

“As for when a plan of adjustment will be offered, it’s hard to see an event on the horizon that would push that forward,” Krist said. “The board is supposed to work for all of the parties but it sure looks like the board is working to perpetuate the management and structure at the utility which have shortchanged Puerto Rico for so long.”

Mudd said he didn’t think there would be an enacted plan of adjustment before 2027 assuming Swain’s decisions are not reversed. If she is reversed, it could be 2029 or later.

If Swain is reversed again “she may become convinced a plan of adjustment cannot be approved and dismiss the Title III [bankruptcy]. Unlikely but possible,” Mudd said.

If Swain dismisses the bankruptcy, there would be a “total free for all,” Mudd said. Bondholders would request a receiver to administer PREPA and a rate increase, the board would object. There would be two to five years of litigation.

Swain is likely to approve a cramdown on the dissenting bondholders, Mudd said. The bondholders would appeal and it remains to be seen what the appeals court would do.

FAFAA didn’t respond to inquiries for this story.