Bishop argues the board has no right to review the PREPA debt restructuring agreement because the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA), passed and signed into law in 2016 to deal with the territory's mounting debt, includes language to keep such out-of-court settlements outside the scope of the board's powers.
The problem with the PREPA deal is that creditors would still get 85 cents on the dollar, which would leave less money for creditors of other Puerto Rican debt issuers to collect.
A recent fiscal plan approved by the oversight board, which doesn't include the PREPA debt, indicates that other creditors will take a 77 percent haircut on $52 billion of commonwealth debt. In other words, they will get just 23 cents on the dollar.
That's one of the reasons other members of Congress disagree with Bishop's view. Reps. Nydia Valazquez, D-N.Y., and Raul Grijalva, D-Ariz., also wrote a letter to Carrion, requesting that the oversight board not certify the PREPA deal.
They say that after careful review, they can't find language in PROMESA that would restrict the oversight board from examining any pre-existing voluntary agreements that are obstacles to economic growth.
"It would be irresponsible to acknowledge that the Board needs to certify the PREPA [restructuring support agreement] as a Qualifying Modification without considering that such a certification would be directly inconsistent with PROMESA's overarching purpose, namely to provide a mechanism for fiscal responsibility and access to the capital markets," they wrote.
Since the initial restructuring support agreement was disclosed in September 2015, the fiscal plan showed the cumulative project cash flow for fiscal years 2017 to 2020 available for debt service as $7 billion. The recently approved oversight board plan dropped that number to $2.8 billion — a 60 percent decline.
Puerto Rico Gov. Ricardo Rossello has also pledged lower electricity rates, but critics say that won't happen under the current PREPA deal.
Puerto Rican economist Gustavo Velez said a mere 15 percent haircut for PREPA investors would result in power rates rising 2 to 3 percent in the next few years. He argues that a 45-50 percent haircut would still garner investors a profit and allow PREPA to reduce power rates.
"Since many of the plants were made in the '50s and '60s they operate at about 70 percent oil use, but in today's age we are moving away from oil," he wrote. "We have obsolete plants with a $9 billion debt, a deal to increase rates is not going to work."
Vicente Feliciano wrote in Caribbean Business that Puerto Rico should transform the assets of PREPA into public-private partnerships regulated by the Puerto Rico Energy Commission. This would likely lower power rates, but this good governance maneuver would also mean more sacrifice from creditors.
"At a time when major sacrifices are rightly requested from the people of Puerto Rico, including pensioners, the University of Puerto Rico and credit unions, it is unacceptable that PREPA's draft fiscal plan recommends only minor improvements on the RSA," Feliciano wrote. "For policy makers dealing with Puerto Rico debt, doing likewise would erode the moral standing of requesting sacrifices from other groups."
Valazquez and Grijalva wrote that higher power rates will have a major negative effect on Puerto Rico as it tries to get back on its financial feet and seeks statehood.
"As currently drafted, the RSA will only accelerate the outmigration of residents and businesses," they wrote. "This downward spiral will deplete what is left of the Island's economic foundation."
Because Puerto Rico's bonds have been tax exempt since 1917, American investors have flocked to them, so this case puts billions of dollars at risk. Some municipal bond funds in the U.S. have nearly half their money tied up in Puerto Rican bonds. That's why the Puerto Rico bankruptcy case has high financial stakes for many Americans.
Because of the risk to investors in the U.S., the oversight board must tread carefully in how it handles each creditor class. It should ignore the overtures of Bishop so that other creditors aren't squeezed in favor of an overly beneficial deal for PREPA.
Johnny Kampis is a freelance writer.
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