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  • Writer's pictureThe San Juan Daily Star

Ad Hoc PREPA Bondholders, bond insurers defend extension of debt talks

Litigation would only distract from the attempts of parties in the Puerto Rico Electric Power Authority’s $9 billion bankruptcy case to reach an agreement, a group of bondholders and bond insurers contend.

By The Star Staff

The Ad Hoc Group of Puerto Rico Electric Power Authority (PREPA) Bondholders and bond insurers Assured Guaranty Corp. and Assured Guaranty Municipal Corp., National Public Finance Guarantee Corp., and Syncora Guarantee Inc. came out against the Unsecured Creditors Committee (UCC) request to allow litigation against PREPA to resume.

The parties are currently in mediation to draft a debt deal to restructure PREPA’s $9 billion debt. The Financial Oversight and Management Board has sought an extension until August of the mediation, which the unsecured creditors opposed and instead asked the court that the parties be allowed to litigate certain issues.

“The parties have devoted substantial time and effort to mediation over the past few months. The PREPA Bondholders therefore consent to the short extension of deadlines requested by the Mediation Team and the Oversight Board,” the bondholders replied. “The UCC again asks the Court to allow litigation to commence on bondholders’ claims and security interests, describing these as key legal issues but this request is merely an attempt to prematurely push the parties into full-scale litigation.”

Contrary to the UCC’s claims, litigation proceeding concurrently with mediation will not “motivate the parties to make progress in settlement discussions,” the bondholders said. Rather, litigation would only distract from the parties’ attempts to reach an agreement, they said.

“As the PREPA Bondholders noted in their May 27 informative motion, the time for litigation in this case may yet arrive. Before heading down that path, however, it is in the interest of all PREPA stakeholders to first give settlement discussions a legitimate chance at success,” the bondholders said. “Furthermore, the UCC’s proposed litigation schedule – allowing lien challenge litigation to proceed first – is fundamentally flawed. First, a potential motion to dismiss PREPA’s Title III case should be heard prior to any other litigation. While dismissal of a bankruptcy should not be taken lightly, if this mediation fails, dismissal must be seriously considered. PREPA is now coming into its sixth year as a debtor – an almost unheard-of period of time in modern bankruptcies. If the current mediation fails, there will be no clear exit from Title III in sight for even more years to come.”

“Should this Court decide it is appropriate to dismiss the PREPA Title III case, the UCC would cease to exist, and any asserted claims with respect to the scope of the bondholders’ liens would become moot,” the bondholders added. “Therefore, this Court need not spend time on those proceedings until after it determines whether or not PREPA should even remain in Title III.”

Second, the bondholders said, the UCC is making misleading statements trying to convince this Court that “challenging the bondholders’ liens will be a quick and easy path, ignoring the significant differences in the terms and provisions of the governing documents.”

Third, the UCC ignores the fact that litigation with bondholders over their liens is a sideshow and a waste of time and resources unless and until the Oversight Board can show that PREPA is unable to pay all of the claims against it in full, the bondholders said.

“Given the fact that the bonds represent the overwhelming majority of valid claims asserted against PREPA, the extent of bondholders’ liens is a secondary issue at best, and of limited relevance and utility in progressing this case,” they said. “Instead, assuming PREPA is to remain in Title III so that it can begin a lengthy and fact-intensive litigation more than five years after filing for bankruptcy, the determination of what PREPA can and should pay to creditors as a whole is the dispute that should move forward first, as it is the only litigation that can lead to a confirmable Title III plan.”

“The UCC’s objection is a transparent tactic to derail the mediation process in favor of lengthy, costly litigation that will ultimately have no material impact on the resolution of PREPA’s Title III case other than to essentially tax the Debtor’s resources with further professional fees beyond those already incurred over the past five years,” the bondholders said. “The PREPA Bondholders are committed to continued settlement discussions through a one-month extension of the mediation process and associated deadlines. Indeed, given that, until merely a few months ago, there was a years-long agreement between bondholders, PREPA and AAFAF that disposed of the overwhelming bulk of claims against PREPA, it seems prudent to believe that such a settlement could be reached again through mediation.”

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