By: Veronica Orantes, 2L
Xavier Garcia, Bloomberg
For over a decade, the Commonwealth of Puerto Rico has been battling a severe financial crisis. It hit rock bottom in 2015, when Governor Padilla of Puerto Rico publicly acknowledged the Commonwealth’s debt was simply “not payable.”[1] The Puerto Rico Electric Power Authority (PREPA) is a Commonwealth-owned corporation responsible for power generation, distribution, and transmission on the island. Today, PREPA has a generation capacity of 5,839 MWand it operates through approximately 34,000 miles of transmission and distribution lines.[2] PREPA has an aggregate principal amount of approximately $8.3 billion in debt outstanding. Therefore, a swift restructuring is necessary to ensure its long-term financial viability and its obligation to provide sufficient power to the island.
On June 30, 2016, the U.S. Congress enacted the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), “one day before $1.9 billion of Puerto Rico’s debt payments became due.”[3] Title III of PROMESA provides for an in-court restructuring method which was drafted based on Chapter 9 of the U.S. Bankruptcy Code.[4] In addition, PROMESA created a federal Financial Oversight and Management Board (the “Oversight Board”) also known as “La Junta.” La Junta’s purpose is to deal with the process of the fiscal crisis with a “one and done” approach, which avoids implementing measures that would require additional steps later on.[5]
Initially, the plan was for PREPA to enter into a negotiated arrangement with its creditors under a Restructuring Support Agreement (“RSA”). The RSA provided for a 15% haircut giving creditors in turn a conversion of their claims into fully secured claims. Once the RSA was approved by the Oversight Board, it would follow a Title IV proceeding.[6] In May 2017, the RSA was rejected by the Oversight Board by a 4-3 vote because they believed PREPA had a better chance at “transformation” under a Title III process.[7]
On July 2, 2017, the Oversight Board filed a Title III claim for PREPA.[8] On July 30, 2018, PREPA, an ad hoc group of creditors, and the Oversight Board, entered into a preliminary RSA (the “Preliminary RSA”). On May 3, 2019, the parties to the Preliminary RSA finally reached an agreement and executed an RSA.[9]
However, the RSA requires the approval of a federal judge. On March 26, 2020, the Oversight Board released a statement announcing their plan to ask the court overseeing the bankruptcy to postpone the hearings for PREPA’s proceeding, in light of the COVID-19 pandemic.[10] To this date, the judge has postponed this hearing eight times and it is still pending.[11]
Parallel to its debt restructuring, PREPA had announced its intent to transform and modernize the electric system in the island by the privatization of its assets.[12] However, this planned was abandoned after concluding valuation of the assets under PREPA’s current financial circumstances would be too low.[13] As a result, it is critical for PREPA to finalize its debt restructuring process in order to move forward with transforming Puerto Rico’s electric system.
Footnotes:
[1] Developments in the Law — Ch. I: Territorial Federalism 130 Harv. L. Rev. 1632, 1638 (2017), http://harvardlawreview.org/wp-content/uploads/2017/04/1632-1655_Online.pdf
[2] Puerto Rico Electric Power Authority https://aeepr.com/en-us/QuienesSomos/Pages/ElectricSystem.aspx (last visited Feb. 21, 2021).
[3] Developments in the Law — Ch. I: Territorial Federalism 130 Harv. L. Rev. 1632, 1638 (2017), http://harvardlawreview.org/wp-content/uploads/2017/04/1632-1655_Online.pdf
[4] Bradley Wendt, Puerto Rico Fiscal Reform: The End Of The Beginning, Law 360 (June 14, 2017), http://www.crai.com/sites/default/files/publications/Puerto-Rico-Fiscal-Reform-The-End-Of-The-Beginning.pdf
[5] David Skeel, Reflections On Two Years Of P.R.O.M.E.S.A., Vol. 87 Num. 3 Revista Jurídica UPR, 866, 874 (2018), http://revistajuridica.uprrp.edu/wp-content/uploads/2018/06/09-2-years-of-PROMESA-1.pdf
[6] David Skeel, Reflections On Two Years Of P.R.O.M.E.S.A., Vol. 87 Num. 3 Revista Jurídica UPR, 866, 874 (2018), http://revistajuridica.uprrp.edu/wp-content/uploads/2018/06/09-2-years-of-PROMESA-1.pdf
[7] Id.
[8] Definitive Restructuring Support Agreement executed by and between PREPA, Oversight Board, and certain bondholders, on May 3, 2019. https://aeepr.com/es-pr/QuienesSomos/Ley17/RSA%20-%20Public%20(May%203rd%202019).pdf
[9] Id.
[10] Financial Oversight and Management Board for Puerto Rico, Oversight Board to Ask Court to Pause PREPA RSA Hearings, (Mar. 26, 2020) https://drive.google.com/file/d/1EgiTySvNox–qERJlUwpjjxgbTcMj3tc/view
[11] Christian Ramos Segarra, Prepa’s RSA Hearing Still On Hold, The Weekly Journal (Jan 8, 2020) https://www.theweeklyjournal.com/business/prepa-s-rsa-hearing-still-on-hold/article_bab9e2d8-318a-11ea-a1dd-2fa8fd05bb1c.html
[12] The Potential Transformation of the Puerto Rico Electric Sector, Government of Puerto Rico Puerto Rico Public-Private Partnerships Authority (Dec. 2, 2019) http://www.p3.pr.gov/assets/generation-market-sounding-2019-12-02.pdf
[13] Puerto Rico Announces New Plan for PREPA, Inframation News (Oct. 25, 2019, 9:59 PM) https://www.inframationnews.com/news/3903577/puerto-rico-announces-
