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Bondholders: PREPA can raise rates to pay debt if mediation fails


U.S. District Court Judge Laura Taylor Swain

By The Star Staff


Puerto Rico Electric Power Authority (PREPA) bondholders warned in a Title III bankruptcy court motion that if no consensual debt agreement to restructure PREPA’s $9 billion debt can be reached in mediation, which was extended to July 1, they will seek to collect their debt, which the utility can pay by increasing rates.


“The PREPA Bondholders have been trying to consensually resolve this case for years. In fact, they entered into three agreements already to do just that,” the bondholders said. “If no consensual agreement can be reached in mediation, the PREPA Bondholders are fully prepared to litigate all of the various issues, and demonstrate the absurdity and bad faith of the evolving positions adopted by the various parties in this case, as well as PREPA’s ability to pay its bondholders.”


“Before we embark upon years of costly litigation, the parties should take the opportunity in mediation to try to reach one more settlement agreement that would finally facilitate a confirmable plan of adjustment,” the group said in a filing last week.


PREPA reached an agreement to settle its debt in 2019 but failed to implement it and earlier this year, the government canceled the proposed restructuring deal. U.S. District Court Judge Laura Taylor Swain recognized the lack of progress and on March 8 instructed the Financial Oversight and Management Board to file, by no later than June 1, either a plan of adjustment, a term sheet for a plan of adjustment, a litigation schedule, or a declaration and memorandum of law showing cause why the court should not dismiss the Title III case.


“After five years without any progress having been made towards a confirmable plan of adjustment, and numerous instances of the government parties committing an about-face and abandoning longstanding settlement agreements, the PREPA Bondholders intend to move to dismiss this case and/or seek appointment of a receiver absent a consensual resolution. At some point, enough is enough,” the PREPA bondholders said in an informative motion to clarify certain aspects of the case.


Swain agreed on May 27 to a petition from the oversight board to extend the process of mediation until July 1, dismissing a request from the Unsecured Creditors Committee (UCC) to allow for litigation on two issues, which it called threshold issues.


The issues the UCC wanted litigated were whether PREPA bondholders’ security interest is limited to funds actually deposited into specified accounts held by the PREPA bond trustee in the amount of some $8 million as of PREPA’s petition date, and whether the PREPA bonds are non-recourse obligations such that the PREPA bondholders have no claim against, and are not entitled to distributions from PREPA for any difference between the face amount of the bonds and the funds on deposit in the specified accounts.


The UCC said PREPA’s bond counsel at the time of issuance of the PREPA bonds explicitly stated that the PREPA bonds are “payable solely from the Sinking Fund.”


While the oversight board said the UCC had raised valid issues concerning the bondholders’ security interest and allowability of their claims, it noted that the issues must be factored into any settlement.


After Swain had agreed to extend the mediation to July to allow for a settlement of the debt deal, the bondholders making up the Ad Hoc Group of PREPA Bondholders, Assured Guaranty Corp. and Assured Guaranty Municipal Corp., National Public Finance Guarantee Corp., and Syncora Guarantee Inc. filed a motion to refute the UCC’s remarks, which were echoed by the oversight board.


The bondholders said the UCC and the oversight board were mistaken in their assertion that litigation regarding the PREPA bonds will be simple and straightforward, “as it requires merely an examination of so-called ‘Threshold Issues,’ consisting of various attempts to invalidate the bondholders’ liens and the UCC’s spurious claim that the PREPA bonds are non-recourse against PREPA.”


“The UCC in particular claims that the issues are purely legal issues, which could be resolved expeditiously,” the bondholders said. “These arguments are entirely divorced from reality.”


The bondholders said the threshold issues would be far more complicated and time consuming than the UCC and the oversight board suggest.


“The UCC posits that these issues have been extensively briefed due to a claim objection that it filed and a bare complaint from the Oversight Board that was filed and immediately stayed. This is wrong,” the bondholders said. “Neither the PREPA trustee nor the bondholders have ever answered the complaint or the claim objection as they were prohibited from doing so under the PREPA RSA, and thus this Court has not yet had the opportunity to review the bondholders’ responses.”


The bondholders said that if the parties were to litigate those issues, bondholders would prevail in demonstrating that they have valid and perfected liens because bond documents contain protections of their interests. Bondholders insisted that PREPA can afford debt payments by increasing rates.


“What the UCC and the Oversight Board fail to take into account is that the litigation they describe is ultimately futile,” the bondholders said. “Notwithstanding the indefatigable desire of certain parties to these cases to reduce recoveries to bondholders whether or not the economic facts on the ground justify such a reduction, PREPA can afford the rates necessary to pay bondholder claims in full, and absent a settlement is required to do so under the Bankruptcy Code. … Thus, even if the UCC or the Board were to succeed in their lien challenges – which they would not – PREPA would still be required to pay bondholders in full absent a settlement.”

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