Time to Renegotiate Prepa Deal, according to Vicente Feliciano in Carribean Business

Opinion piece by Vicente Feliciano in Carribean Business:

Agreements reached under duress come undone when the power of one party to impose the deal subsides. The agreement between the Puerto Rico Electric Power Authority (Prepa) and its bondholders was reached when there was no legal framework to restructure debt. The Puerto Rico Oversight, Management & Economic Stability Act (Promesa) now brings this legal framework and Prepa should force a renegotiation with bondholders of what is at present a bad deal for Puerto Rico.  The Prepa deal establishes that the majority of bondholders will be paid in full, 100 cents on the dollar. A minority of bondholders will be paid 85 cents on the dollar. This is outrageous in light of the expected discounts on principal on other bonds, the expected fiscal adjustments on the people of Puerto Rico, the expected losses to credit unions and the expected cuts in pensions of government retirees.On July 1, 2016, general-obligation bonds, guaranteed by the Puerto Rico Constitution went unpaid, both principal and interest. However, Prepa bondholders were paid. The Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) debt, collateralized with the sales & use tax, or IVU in Spanish, is trading at some 40% discount because this is the discount that the market expects the bonds to take as a result of debt restructuring, but the majority of Prepa bondholders will be paid 100 cents on the dollar.  In order to pay Prepa bondholders, the majority at 100 cents on the dollar, there would have to be a surcharge of 4.4 cents per kilowatt-hour (kWh), or some $750 million per year. This is the equivalent of almost a 3.5 percentage point increase in the IVU. Proposing such a huge tax increase on a weakened economy beset by emigration should bring howls of protest and indignation. However, the Prepa surcharge is discussed as if it would have no impact on the rest of the economy. This is not correct.

Source: Time to Renegotiate Prepa Deal – Caribbean Business

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Economist at Santa Clara University and Director of Friends of African Village Libraries.
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