Published on March 25, 2022 / Leer en español
In This Issue
The recently terminated PREPA Restructuring Support Agreement (“RSA”) was the third failed attempt to restructure at least a portion of PREPA’s debt. Judge Taylor Swain, in her March 8 Order, expressed her concern that “the termination announcement presents the risk of a major setback in progress toward readjustment of PREPA’s liabilities.” She also imposed a tight deadline for the Financial Oversight and Management Board to commence a mediation process and file a plan of adjustment, or a term sheet thereof; submit a schedule for the litigation of pending issues; or show cause as to why the Court should not dismiss the Title III case. Time, therefore, is of the essence.
However, while we fully understand the desire to expeditiously conclude this process after five years of expensive and drawn-out negotiations, it is just as important to get right both the process and the substance of the debt restructuring.
In this Review, we offer some recommendations that hopefully will provide a useful framework to thoughtfully analyze any new proposal to restructure PREPA’s debt. Click here for the complete analysis which also includes a deeper look at the current state of PREPA’s debt restructuring process.
–Sergio M. Marxuach, Editor-in-Chief
Insights + Analysis from CNE
Five Recommendations for PREPA’s Debt Restructuring
By Sergio M. Marxuach, Policy Director
- Any new plan of adjustment for PREPA has to be comprehensive in nature – This means the plan of adjustment must take into account the complicated environment in which PREPA operates, Puerto Rico’s weak economy, the fragility of the island’s transmission and distribution system, PREPA’s aging generation fleet, the politicization of its management, and PREPA’s prior history of mismanaged initiatives to reduce costs.
- A restructured PREPA should be a solvent entity – This is more than a mere accounting technicality. If PREPA is still insolvent, even after exiting the negotiation process, then it is questionable whether the plan of adjustment would be confirmable by the Court. While PROMESA does not require that solvency be established to confirm a plan of adjustment, it does require that it be “viable” and certainly solvency is at least one component of any “viability” analysis.
- Debt reduction has to be drastic – According to PREPA’s Monthly Report to its Governing Board for the Month of December 2021, PREPA’s liabilities totaled $18.1 billion, while its assets added to $10.1 billion, a difference of $8 billion. In theory, then, that is the minimum amount — $8 billion or 44% of all liabilities — by which all of PREPA’s obligations would have to be reduced in order to keep it as a minimally sustainable going concern post-restructuring. It would be extremely ironic, not to say utterly irrational, to finish this expensive five-year process with an entity that is still technically insolvent.
- Eliminate the securitization structure – Securitization would have guaranteed the repayment of the new PREPA bonds regardless of PREPA’s operational situation and would have represented a significant upgrade of the bondholder’s collateral package. The repayment guarantee for any new PREPA bonds, as is the case with the existing PREPA bonds, should be a lien against the net revenues (after payment of the operating costs of the issuer) generated by PREPA. We see no reason for upgrading this security structure or for substantially modifying PREPA’s current relative repayment priorities, unless creditors provide an infusion of new money, something analogous to a debtor in possession financing, or some other similar consideration.
- Any rate increase to pay off debt will have negative economic consequences – Electricity prices affect economic activity and economic activity affects electricity prices. Any significant rate increases to pay off debt would reduce economic activity and employment, which, in turn, would reduce demand for electricity. Lower demand for electricity would force PREPA to further increase its rates to cover operating costs and meet its obligations. Failure to do so would result in the deferment of capital investments and/or maintenance costs, which would adversely affect the quality of service. And under that scenario, we could expect an increase in “grid defection.” That is, we could expect an increase in the number of customers switching to their own generation sources or connecting “informally” to the PREPA grid.
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On Our Radar...
War in Ukraine – The Russian invasion of Ukraine threatens the post-1945 rules-based international order that brought peace and prosperity to the West (and Japan) over the last 75 or so years. Beyond his immediate aims in Ukraine, Putin seeks to overturn the post-Second World War settlement in Europe, to rebuild the greatness, at least in his mind, that was the Russian Empire. Opening that door only leads to dark paths that end in some very scary places. Here are some books to help you understand the larger forces of history at play in Europe right now:
- Timothy Snyder, Bloodlands: Europe Between Hitler and Stalin, (Basic Books, 2010);
- Anne Applebaum, Red Famine: Stalin’s War on Ukraine, (Doubleday, 2017);
- Tony Judt, Postwar: A History of Europe Since 1945, (Penguin, 2006);
- Anna Reid, Borderland: A Journey Through the History of Ukraine (Basic Books, 2015);
- Serhii Plokhy, The Gates of Europe: A History of Ukraine, (Basic Books, 2021);
- Svetlana Alexievich, Secondhand Time: The End of the Soviets (Random House, 2017);
- Charles Clover, Black Wind, White Snow: The Rise of Russia’s New Nationalism (Yale, 2016); and
- Timothy Snyder, The Road to Unfreedom: Russia, Europe, America, (Tim Duggan Books, 2018).
Russian Geopolitics – Stephen Kotkin, professor of History and International Affairs at Princeton, wrote this synthesis of the history driving Russia’s geopolitics for Foreign Affairs in 2016. According to Professor Kotkin, “for half a millennium, Russian foreign policy has been characterized by soaring ambitions that have exceeded the country’s capabilities.” Throughout the past five hundred years, “the country has been haunted by its relative backwardness, particularly in the military and industrial spheres. This has led to repeated frenzies of government activity designed to help the country catch up, with a familiar cycle of coercive state-led industrial growth followed by stagnation. Most analysts had assumed that this pattern had ended for good in the 1990s, with the abandonment of Marxism-Leninism and the arrival of competitive elections and a buccaneer capitalist economy. But the impetus behind Russian grand strategy had not changed. And over the last decade, Russian President Vladimir Putin has returned to the trend of relying on the state to manage the gulf between Russia and the more powerful West.”
The European Response – In times of geopolitical crisis, security and sovereignty prevail over everything else. The European Union struggles with the demons of that defensive reflex even as it faces Russia over its invasion of Ukraine: “As a paranoid dictator, Vladimir Putin has survived by eliminating anyone who could pose a threat to him. But now that he has triggered the survival instinct of Europe and the broader West, the world is entering a dangerous new phase of existential conflict”, writes Mark Leonard, Director of the European Council on Foreign Relations, for Project Syndicate.