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  • Writer's pictureThe San Juan Daily Star

Attorneys general, SIFMA argue upholding PREPA bond ruling will hurt markets

Virginia Attorney General Jason Miyares

By The Star Staff

The attorneys general of 14 states and the Securities Industry and Financial Markets Association (SIFMA) have filed friend-of-the-court briefs in an appeal of a ruling in the Puerto Rico Electric Power Authority (PREPA) bankruptcy case, arguing that repealing security interests in the PREPA bonds would hurt municipal markets nationwide.

SIFMA represents hundreds of securities firms, banks and asset managers -- including many that actively participate in the municipal revenue bond market.

“A robust bond market allows municipalities across the United States and its territories -- including Puerto Rico -- to fund projects and services despite many demands on those municipalities’ finite resources,” SIFMA said in a Dec. 19 motion.

The federal judge overseeing PREPA’s bankruptcy, Laura Taylor Swain, earlier this year ruled that the bonds issued by PREPA gave bondholders security interests under the utility’s trust agreement only in money received and deposited into a fund created by the trust agreement, rather than a security interest in future revenues not yet received for energy not yet generated. Swain concluded that future revenue was a “mere expectancy” rather than property and, therefore, could not be a security interest under federal bankruptcy law. She also declared that bondholders had an unsecured claim to net revenues that the court reduced from about $9 billion to $2.38 billion.

“These conclusions upended a fundamental market expectation: that a pledge of revenues in connection with a municipal-bond issuance secures the repayment of principal and interest on those bonds, and that this pledge is valid when the municipality obligated on the bonds receives the revenues (as opposed to when the revenues are deposited into a fund),” SIFMA said. “The outcome of this appeal is thus of core importance to SIFMA’s membership. If the Court affirms the decisions below, it will harm the municipal revenue bond market and the issuing municipalities by raising questions about the security and predictability of those investments, thereby raising municipalities’ borrowing costs and complicating an otherwise reliable funding source.”

The Commonwealth of Virginia and the states of Alabama, Florida, Georgia, Iowa, Kansas, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Texas, Utah and West Virginia also urged the appeals court to overturn Swain’s ruling in an appeal brought by a group of creditors.

“The Court here is asked to affirm a district court decision that undermines both state and federal laws and would upset the settled expectations of States, not to mention a multi trillion dollar market,” the attorneys general said. “Doing so would frustrate the States’ interest in protecting the public [fiscal health] and efficiently governing for their citizens. It would also undercut States’ authority to create and enforce a legal code.”

“In fact, affirming the district court’s decision will needlessly overturn long-settled expectations for municipal bonds,” they added. “It will inject uncertainty into the municipal revenue bond market, raising the cost of capital for important public projects across the country.”

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