Bonds

Puerto Rico board chair says PREPA payout remains unclear

The Puerto Rico Oversight Board and other parties are still trying to determine how District Court Judge Judge Laura Taylor Swain’s March ruling in the Puerto Rico Electric Power Authority bankruptcy will affect the bondholders’ payout, Puerto Rico Oversight Board Chair David Skeel said Friday.

“The implications for the claim that the bondholders have is not entirely clear,” Skeel said at Friday’s board public meeting. “What the judge said was that [bondholders] have a claim on net revenues. So there’s going to have to be a calculation of what net revenues means.

“The initial effect of all this would be to shift who gets what,” Skeel said. “It’s not clear that it will actually change what the affordability numbers are and what gets paid out.”

Skeel said if bondholders appeal the Swain decision, as they say they will do, and they lose, the court could restrict the bondholders’ claim to just what was in the authority’s sinking fund and a few other funds when the bankruptcy was filed. This would give them a payout of about 0.21%.

In that case, effectively the total payout anticipated by the plan of adjustment for PREPA liabilities would go down.

Skeel said the key issue for the bankruptcy was what the Puerto Rico people can afford to pay toward the authority’s liabilities. The board has focused on this and will be defending this in the plan of adjustment confirmation process. The board is working on a $5.68 billion proposed PREPA plan of adjustment for outstanding debts.

Skeel said the board was not engaged in formal mediation with the bondholders right now but there were conversations outside of mediation.

Also at the meeting, Board Executive Director Robert Mujica highlighted three concerns about the central government and the municipalities.

He said while Puerto Rico’s central government, under the board’s direction, has been reducing its funding for the municipalities and would end it altogether in fiscal 2025, the board has arranged several other new streams of funding for the municipalities. Mujica also said the municipal governments should explore several options for increasing revenues and reducing spending. Among the latter he listed was “re-profiling” their debt.  

Mujica said the board, local legislature, governor, and municipal governments must come up with plans to address municipal financial stress by June 30.

Mujica said the costs of expanding the island’s earned income tax credit program are turning out to be higher than expected. He said the board was originally expecting they would run the local government about $200 million a year beyond the federal government’s capped $620 million a year contribution. Instead, it now expects the local government costs will be about $630 million to $730 million a year.

While the EITC program has expanded Puerto Rico’s labor force and aided the island’s economy, the board and the Puerto Rico local government will have to figure out a way of accommodating the higher outlays, Mujica said.

Finally, Mujica said the board was working to reform Puerto Rico’s taxes in a way to reduce complexity, enhance equity, increase transparency, reduce administrative and compliance costs, and maintain, if not enhance, revenue. Some of the guiding principles will be to broaden the tax paying base, lower rates, simplify the tax code, maintain fairness, and reduce tax expenditures.

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