One of the same banks that drove the Puerto Rico Electric Power Authority, or PREPA, into the red will now be paid to help auction it off to the highest bidder.
Citigroup Global Markets Inc., or Citi, will be the main investment bank consultant in the restructuring and privatization of PREPA, the Washington-appointed Fiscal Control Board — the body now overseeing Puerto Rico’s finances — announced recently. Puerto Rico Gov. Ricardo Rosselló first announced the move toward privatization last month.
“Citi will advise the Board on PREPA’s privatization,” the Fiscal Control Board wrote in a statement, “as well as the restructuring of PREPA’s debt pursuant to Title III proceedings in federal bankruptcy court. Citi will take the lead in identifying private sector solutions that fulfill the vision laid out by Governor Rosselló.”
The board said it “welcomed … Rosselló’s call for PREPA’s complete transformation.”
Citi is responsible for having underwritten large chunks of the utility’s $9 billion in debt, and at one point owned at least hundreds of millions of dollars in PREPA bonds directly, according to an analysis from the Action Center on Race and the Economy. Citi “has been profiting from helping push Puerto Rico over the edge for a long time,” said Carrie Sloan, ACRE’s research director.
In 2015, as the island’s financial situation was becoming more dire, Citi sold off $146 million of its holdings of PREPA debt to Solus Alternative Asset Management LP. Along with JPMorgan Chase, Citi was one of two lead underwriters of a 2010 Series XX Power Revenue Bond from PREPA, which featured an $822 million principal; of that, $191 million was allocated toward paying back lines of credit to those two banks. Citi was also among many banks to underwrite several different classes of bonds in 2003, 2004, 2005, 2007, 2008, 2012, and 2013, at least. (It’s common for several different banks to underwrite bonds. The 2008 PREPA bond Citi underwrote, for instance — some proceeds of which went toward repaying a Citi loan — had 17 underwriters.)
The bank has profited elsewhere on the island, as well. Citi was among the underwriters of eight capital appreciation bonds, or CABs, and the lead underwriter on five of those. The principal on all eight CABs totaled $2.7 billion, though interest on them — charged at a whopping rate of 718 percent — came to $22.8 billion. The bank was also the second-largest underwriter in Puerto Rico of so-called scoop and toss financing deals, which — while allowing bond issuers to push payments off into the future — also means heaping additional fees and interest onto preexisting principal and interest payments. From 2000 to 2016, the bank collected $302 million in fees off underwriting $11.3 billion in scoop and toss arrangements, the second largest of any collection off these type of deals.
Citi declined to comment on questions about how much it would be paid through its renewed contract with the board, its experience with debt restructuring and electric utilities, or how much it has made from underwriting or its current debt holdings in PREPA or on the island more generally. The Fiscal Control Board, through its communications consultant, also declined to comment on the contract beyond its initial statement.
“Citigroup repeatedly sold Puerto Rico and PREPA in particular predatory forms of debt that pushed the island deeper and deeper into unsustainable levels of debt,” said Saqib Bhatti, ACRE’s co-executive director. “Banks screwing things up and saying they’re going to come in and fix it is quite common. You have a list of approved underwriters and they become de facto advisers. So they make bad deals that go badly, but then are at the top of the list to clean them up.”
That’s essentially what happened when Congress created the oversight board after passing PROMESA, the legislation that outlined the legal framework for its creation, in 2016. Two of the board’s current members, José Ramón González and Carlos García, are both former executives at the Spanish bank Santander who oversaw accounts in Puerto Rico during their time there. Under their watch, the bank underwrote $61.2 billion of the island’s at least $74 billion in debt. Over the last several years, both González and García have also alternated between gigs at Santander and top posts in Puerto Rico’s Government Development Bank, the body responsible for issuing government bonds.
Big banks like Citi and Santander have been adroit about their dealings in Puerto Rico, insulating themselves from some of the risks shouldered by hedge and mutual funds. Investment banks don’t tend to own all that many Puerto Rican municipal bonds directly, instead making most of their money on the island by underwriting debt and collecting huge fees during restructuring agreements, putting their staffs to work figuring out ways to do more of the above. “The role banks have played is to constantly push the island to keep restructuring and refinancing its debt. Their interest isn’t based in holding the debt, but in making money off the fees they get for doing the deals,” Bhatti told The Intercept. The profit is in the churn.
For the most part, Wall Street made a bad financial situation in Puerto Rico even worse. When a series of corporate-friendly tax breaks began to expire in 2006, manufacturers left the island, and its bond rating was dramatically downgraded soon after. When it was all but abandoned by capital markets as a result, investment banks swooped in with an offer that seemed too good to refuse: quick cash. Not unlike payday loans, the caveat was that the interest rates on the bonds the banks issued were sky high.
Thanks to Wall Street’s involvement, Puerto Rico’s debt hasn’t just gotten bigger, it’s also gotten endlessly more complex, housed in risky products like auction rate securities and interest rate swaps, which imploded after the recession and left Puerto Rico’s government on the hook for $40 million. The latter are what’s known as add-ons, a financial product used to protect against the risk imposed by another financial product — in this case, variable-rate bonds. In short, Wall Street banks sold intentionally risky products to the Puerto Rican government, then sold them additional, also-risky products to protect them against the risk from the first product.
Citi and Goldman Sachs in 2006 also helped create something called the Corporación de Financimiento de Interés Apremiante, or COFINA; it translates to English as “Urgent Interest Financing Corporation.” A type of CAB, COFINA bonds allowed underwriters to bypass both Puerto Rico’s debt limit and arcane balanced budget requirement, creating a pathway for the Puerto Rican government and public institutions there to borrow an additional $17 billion. The agreement that created COFINA CABs made it illegal, as well, for the legislature to pass any policies that would infringe on collection at any point in the future. Recently, COFINA bondholders have been engaged in a legal war with general obligation bondholders, who own around $18 billion in debt, over which party has a legal claim to the island’s dwindling revenues.
Interest rates and potentially illegal products like COFINA bonds, which are backed by sales taxes, make it hard to estimate the true value of the commonwealth’s debt, Bhatti said. “That $74 billion figure is completely unreliable,” he explained. “One of the big mysteries of PR’s debt is that nobody really knows how much it has, not even the government itself.” Analyzing Puerto Rico’s debt, ACRE found a major discrepancy between the figure listed in government filings and those on the Bloomberg Terminal, which contains records of the debt held in each individual bond. Where the Securities and Exchange Commission had listed the amount held in capital appreciation bonds at around $18 billion, the Terminal’s figures come to $38 billion, including capital and interest.
The Puerto Rico Commission for the Comprehensive Audit of the Public Credit, charged with investigating both the size and legitimacy of Puerto Rico’s debt, was created in part to address such discrepancies. But shortly after Rosello’s New Progressive Party came to power this year, it led a charge in the Puerto Rico legislature to disband the audit commission via Senate Bill 428, which declared the body “redundant” with the oversight board and “an additional and unnecessary public expense.” Protesters opposed to the bill chanted, “We want an audit done in order to remove the scum,” as it went to a vote in San Juan. Shortly thereafter, on May Day, 50,000 people marched to see an audit process re-established.
Banks have not been the only companies to profit off Puerto Rico’s economic misfortune — or the aftermath of the 2017 hurricane season. As in the case of other indebted governments, like Detroit or Atlantic City, a small coterie of legal and accounting firms have descended on Puerto Rico, charging premium rates to manage the debt restructuring process.
“If there’s a winner out of this whole debacle, it’s the consultants,” said Lara Merling, a research assistant at the Center for Economic Policy and Research who’s been tracking the situation in Puerto Rico. “They’ve all been paid a lot of money and they’ve continued to be paid.” All of the money paid to consultants — for either the board or the island’s government — has come out of Puerto Rico’s operating budget.
As of last July, the island had paid $154 million to consultants, according to data collected by the island’s Comptroller’s Office, Bloomberg reported. AlixPartners LLP was paid $45.6 million of that. The consulting firm’s managing director, Lisa Donahue, was tasked with restructuring PREPA’s debt from September 2014 through February 2017; a restructuring agreement was never implemented. The firm enlisted by Rosselló’s administration when it took office last winter, Rothschild & Co., had already been paid $6.4 million by that summer. Over the course of just a year, consultancy McKinsey & Co.’s contracts with the board could earn it a whopping $24 million.
The consultants’ day-to-day work takes place largely behind closed doors and has resulted in documents like Puerto Rico’s new fiscal plan, which outlines an intention to sell off large swaths of the island’s private sphere in the name of increasing competitiveness and access to capital markets. Eric LeCompte, executive director of Jubilee USA Network, has worked with governments experiencing sovereign debt crises and has seen a pattern emerge. “There are a fairly small number of actors. They tend to do everything the same and offer same kind of advice,” he told The Intercept. Namely, he said, they recommend deep cuts to the public sphere and large-scale privatization. “Our concern with how debt restructurings often happen,” LeCompte said, “is that consultants too often turn to traditional prescriptions that haven’t necessarily worked. We believe fundamentally that austerity hurts economies when they’re trying to get back to economic growth.”
He called it the “sovereign debt industrial complex” and said the group of firms involved rely “more on what hasn’t worked and have less room for innovation.”
Among the first public goods on the chopping block for privatization are electric utilities like PREPA, especially in the Caribbean. Key to economic growth, power infrastructure on island countries depend largely on costly imported oil. Painting that expense as a barrier to economic growth has become a favorite tactic among both consultants and the International Monetary Fund, which has reliably recommended utility privatization as a part of its structural adjustment programs. Sitting among islands that have sunk deeply into debt over the last several decades, Puerto Rico is among very few islands in the Caribbean islands to still have a public electric utility.
Despite these and other privatizations, Caribbean island nations remain trapped under mountains of both debt and, now, austerity measures. As the Financial Times reported in 2013, overall debt burdens in the region amount to more than 70 percent of its collective GDP.
“The capitalists will sell us the rope with which we will hang them,” Lenin is famously reported to have quipped. But he never said it, which is just as well, since it’s slightly off. The capitalists will sell you the rope with which you’ll hang yourself — and then buy it back at a discount when you’re finished.