This column was originally published in Spanish by El Nuevo Día on February 23, 2025
For several months, the process under PROMESA to restructure the debt of the Puerto Rico Electric Power Authority (PREPA) was dominated by a legal question before the U.S. Court of Appeals for the First Circuit.
Now that the court has made its decision, the Oversight Board will continue to work on a consensual resolution with all parties that does not undermine PREPA’s future. Economic growth is key to Puerto Rico’s future but it is nearly impossible to attract new businesses or encourage the expansion of existing ones and end out-migration without a stable and reliable electricity system.
The recent First Circuit opinion makes clear that PREPA’s bondholders have “a non-recourse claim on PREPA’s estate for the principal amount of the bonds, plus matured interest” (approximately $8.5 billion). As a non-recourse claim, it is payable solely from PREPA’s net revenues as referenced in the bond indenture, that is the terms of the bond agreement.
In addition, the bondholders seek more than $3.5 billion in post-petition interest, that is interest accrued but unpaid after PREPA entered the debt restructuring process under Title III of PROMESA. But such post-petition interest is only allowed if the creditor is “over-secured,” meaning the secured creditor’s collateral, in PREPA’s case future net revenues, is worth more than its $8.5 claim.
As referenced above, a significant part of the First Circuit’s ruling is that payment for the bondholders’ claim is limited to their collateral under the indenture — collateral being net revenues. The First Circuit said that bondholders do not have any recourse to any other source of payment other than net revenues. That means, if net revenues do not exist or are insufficient to pay bondholders in full, there is no other source of payment available for bondholders under the applicable agreement.
It is clear that the primary dispute is the value of the net revenues. Given PREPA’s current condition, the Oversight Board does not believe there are, or likely ever will be, sufficient net revenues to satisfy the bondholders’ claim. PREPA needs far more maintenance than anyone has foreseen up to now, and its infrastructure is so deteriorated, the costs of maintenance and operation leave little or no revenues in excess of expenses. Years of neglect at PREPA have come home to roost. It must be dealt with now.
For this and other reasons, our Plan of Adjustment provides payment to the non-consenting bondholders of substantially less than what they have claimed. To pay the bondholders’ claim – without interest – would increase rates by more than 7 cents per kilowatt hour (kWh). This does not include funding for pensions, which may be more than 2 cents per kWh. Those increases would overburden ratepayers, likely resulting in the ultimate collapse of PREPA. That would benefit neither PREPA’s ratepayers, nor its creditors.
At times I have heard the cry that the Oversight Board just wants to litigate and is not interested in a consensual resolution. That is belied by the more than eight-year history of the Oversight Board. All seven debt restructurings completed so far have been consensual. Even PREPA’s, claimants holding 44% of the debt already agreed to the Oversight Board’s proposed Plan of Adjustment. We continue to try to build on that record.
We also know what’s at stake. As Chair of the Oversight Board, I will continue with my fellow board members to try to reach an agreement that does not undermine PREPA’s future. We will continue to work with all parties to reach a consensual agreement that will end this bankruptcy and leave PREPA with the critical resources to make the necessary expenditures that will provide Puerto Rico with reliable electricity.
