Op-Ed: PR in for ‘rude awakening’ opting for bankruptcy

Written by  //  July 6, 2017  //  Biz Views  //  1 Comment

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Author Richard Lawless is a former senior banker who has specialized in evaluating and granting debt for over 25 years. He has a Master’s Degree in Finance from the University of San Diego and Bachelor’s Degree from Pepperdine University. He sits on several corporate boards and actively writes for several finance publications.

If Puerto Rico thinks bankruptcy is a better solution, they have a rude awakening coming. One should look no further than the Puerto Rico Electric Power Authority’s (PREPA) pending bankruptcy.

All credible financial analysts agree that PREPA only needs slightly more than a 10 percent reduction in debt service to continue paying its bills and operating as expected.

Over a three-year period, the utility negotiated with its bondholders for a 15 percent reduction in debt. This consensual agreement gave the utility almost 50 percent more than it needed to get back on track.

If the bankruptcy judges execute the hearings without personal or political bias, PREPA will get only what it needs to operate safely. That number should reflect about a 10 percent reduction in debt, far less than was offered to the utility in their consensual negotiations with bondholders.

For PREPA to receive a more favorable outcome in court, it will have to shape an argument based on the following factors:

  1. PREPA has allegedly been overcharging its customers every year for high-quality crude oil while paying and taking delivery of sludge oil. The difference in cost is hundreds of millions of dollars each year. That money is unaccounted for. (Business wire 4-16-16, RICO Lawsuit)
  2. PREPA must pay unusually high accounting fees to KPMG to produce misleading financial statements each year. (KPMG lead auditor, Puerto Rico Senate Hearing 6-24-15)
  3. PREPA must pay unusually high bond rating fees each year to secure misleading bond ratings for their new bond offerings. (Puerto Rico Monitor 4-5-16, FINRA Settlements, on-going SEC Investigations)
  4. PREPA must pay unusually high sales fees to the major Wall Street Banks for them to knowingly market troubled bonds as safe investments. (Reuters 6-28-17)
  5. PREPA budgets hundreds of millions of dollars each year for equipment maintenance and the money disappears while the repairs are rarely done. (SEC Whistleblower Financial Audit 1-18-16)
  6. The Puerto Rico Fiscal Control Board, although mandated through legislation to approve consensual agreements with Puerto Rico’s creditors, has elected to ignore the legislation, costing PREPA many millions in future litigation. (Puerto Rico Fiscal Control Board 6-27-17)
  7. PREPA has numerous lawsuits, FBI and SEC investigations going on now, costing PREPA tens of millions in legal and consulting expenses. (AlixPartners $28 million, etc.…)
  8. PREPA has massive unfunded pension obligations, although the pension contributions are budgeted every year they rarely contribute what was promised.

The PREPA attorneys and accountants will have to shape and argument that if they are to maintain their current level of mismanagement and malfeasance, more money must be taken from the innocent bondholders.

In an honest legal system, PREPA is unlikely to prevail.

One Comment on "Op-Ed: PR in for ‘rude awakening’ opting for bankruptcy"

  1. John July 9, 2017 at 11:31 PM · Reply

    Let us not forget that Richard Lawless also held substantial amounts of PREPA bonds…. not exactly an unbiased third party opinion here.. Title III is overseen by a US federal judge with plenty of bankruptcy court experience who has not exactly been debtor friendly..

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