A group of companies insuring the Puerto Rico Electric Power Authority’s debt filed a motion in the U.S. District Court for the District of Puerto Rico Tuesday, asking for the appointment of an independent receiver to pursue increased rates and to oversee certain operations of the public corporation.
The group, comprised by National Public Finance Guarantee Corporation, the Ad Hoc Group of PREPA bondholders, Assured Guaranty Corp., Assured Guaranty Municipal Corp. and Syncora Guarantee Inc. asked the court to lift the PROMESA stay to be able to take action.
“As PREPA’s single largest creditor, we worked tirelessly for several years with all stakeholders on a comprehensive restructuring that the Oversight Board forced off the table in violation of PROMESA,” said Bill Fallon, CEO of National Public Finance Guarantee Corporation.
“As a result of the default precipitated by the Oversight Board’s unlawful action, we now have little option but to enforce our legal and contractual rights, and to ensure PREPA sets rates and charges that are sufficient to meet its financial obligations,” said Fallon.
“We cannot allow PREPA to continue to ignore its obligations under Puerto Rico law and the terms of our Trust Agreement. Given PREPA’s lengthy history of mismanagement and cronyism and the inherent conflicts of interest ignored by the governor and the Oversight Board, an independent receiver will provide much-needed protection for PREPA, the citizens of Puerto Rico and its creditors,” he said.
“It is imperative that the rule of law is recognized and that the political manipulation of PREPA is halted. We continue to support the utility’s long-term viability and access to the capital markets,” Fallon added.
Puerto Rico law and the PREPA Trust Agreement requires the utility to set electricity rates at amounts sufficient to enable it to pay its debts, which include approximately $8.3 billion of outstanding bonds.
Accordingly, the motion seeks to lift the stay under the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA,) so the creditor group can enforce their rights under Puerto Rico law and the Trust Agreement following the payment default by PREPA earlier this month.
Bondholders holding at least 25 percent in principal amount of the PREPA bonds outstanding have a statutory right to the appointment of a receiver following an event of default. National, along with rest of the Creditor Group, represent almost 70 percent of the outstanding bonds, the companies said in a statement.
In addition, National has filed an amended complaint in its lawsuit against the Oversight Board, asking the U.S. District Court for the District of Puerto Rico to award National damages for the Oversight Board’s unlawful rejection of the RSA.
Meanwhile, Assured said a receiver for PREPA would ensure that the lien granted to bondholders and their insurers as part of their collateral package produces net revenues in amounts sufficient to timely pay debt service on the PREPA bonds.
“With this action, Assured Guaranty seeks to remedy PREPA’s re-politicization of its operations, its mismanagement and inefficiencies, and its failure to increase rates in accordance with its contractual and statutory obligations,” the insurer said in a statement.
PREPA, which had not sought an increase in its base rates from the 1980’s through 2015, and whose current rate is inadequate to pay its debt, defaulted on its bond debt service payment due on July 3, 2017.
“For decades, PREPA has been crippled by mismanagement, corruption and poor performance. Due to such mismanagement, corruption and poor performance, PREPA has breached its contractual and statutory obligations to increase rates in amounts sufficient to generate adequate cash flow to service PREPA’s bond obligations,” Assured said.
The collateral package for PREPA’s bonds includes not only the net revenues generated by current rates but the statutory and contractual right to increase rates and appoint a receiver with the power to seek rate adjustments.
“PREPA’s use of the automatic stay to prevent required rate increases and to maintain inadequate current rates is a taking of property without just compensation. As a result of PREPA’s defaults, Assured Guaranty and PREPA’s bondholders are entitled to the appointment of a receiver for PREPA under Puerto Rico law and PREPA’s bond documents,” Assured further stated.
“This entitlement to a receiver is automatic upon the occurrence of a default under PREPA’s bonds. Lifting the automatic stay and appointing a receiver for PREPA is necessary to ensure PREPA bondholders’ collateral package is not diminished and to foster operational reform by replacing PREPA’s management and depoliticizing PREPA’s key decision-making,” the insurers said.
“Additionally, the ongoing illegal actions by both the Puerto Rican government and the PROMESA Oversight Board will result in further wasted funds incurred by the government on needless and time-consuming litigation, while at the same time further destroy any market credibility that remains in the government and the Oversight Board,” Assured added.
If continued, these illegal actions will ultimately prohibit Puerto Rico’s access to capital, which is critical for the island’s economic development and future, the company further noted.