Fiscal board: Court should value bondholders’ collateral to help move PREPA out of bankruptcy.

The Financial Oversight and Management Board in 2023

By THE STAR STAFF

The Financial Oversight and Management Board wants the judge overseeing the Puerto Rico Electric Power Authority (PREPA) Title III bankruptcy to immediately shift to valuing the bondholders’ collateral, because that determination is the critical missing piece needed to confirm a plan of adjustment and move the power utility out of bankruptcy. 

PREPA has been in bankruptcy since 2017 to restructure some $9 billion in debt but has been unable to reach an agreement with bondholders. In a recent status report, the oversight board contends that continued litigation over past accounting issues is wasteful, backward‑looking, and obstructive, and that the bondholders’ tactics are delaying resolution rather than advancing it. 

In arguing for the need of a collateral valuation, the oversight board said in the March 31 status report that the First Circuit has already ruled that bondholders hold a lien only on PREPA’s “Net Revenues” and nothing more. Because bondholders are non‑recourse creditors, the value of those net revenues equals the maximum possible recovery they can ever receive. Therefore, the court must now determine the value of the bondholders’ collateral under Bankruptcy Code § 506 and Rule 3012. 

Once the collateral is valued, the amount of the bondholders’ sole secured claim will be fixed, the oversight board noted. It will become clear whether the current plan is confirmable or needs amendment. Settlement may become more likely because the bondholders’ leverage will be capped and the case can move toward confirmation and exit from Title III. 

While the bondholders want to lift the automatic stay or dismiss the bankruptcy case, the oversight board said valuing the collateral directly resolves the core issue underlying stay‑relief requests, and the courts do not dismiss municipal bankruptcies when a potentially confirmable plan is actively being pursued. 

The bondholders want to litigate an “accounting claim” to examine PREPA’s past handling of revenues. 

The oversight board proposes a tight, court‑managed timeline: Between April and June of this year there will be a limited fact discovery (focused on valuation) and expert reports. Briefing and evidentiary hearing can take place in July. A court‑determined value of the bondholders’ secured claim can take place by late summer this year.  

The Unsecured Creditors Committee and the Puerto Rico Fiscal Agency and Financial Advisory Authority support the oversight board’s petition. 

The Fuel Line Lenders stated that they are bound by a previously negotiated plan support and settlement agreement with the oversight board and expect the board to continue pursuing a plan consistent with that agreement.  

PREPA’s Employees’ Retirement System (SREAEE by its initials in Spanish), noted that valuation of the bondholders’ collateral could affect issues central to its interests, including the characterization of revenues and expenses, the scope and value of collateral, and the allocation of value among competing claims. SREAEE therefore reserves all rights to participate fully in collateral valuation proceedings and any related discovery. 

The bondholders assert that although they remain open to a consensual resolution, PREPA’s nearly nine-year bankruptcy and continued use of net revenues without payment or formal adequate protection demonstrates a lack of incentive by the oversight board to resolve the case promptly. Citing the First Circuit’s confirmation of their perfected security interest in PREPA’s net revenues, they argue that their collateral remains unprotected and that recent court rulings heighten the urgency of relief. They therefore request that the litigation stay be lifted to allow their pending motions for stay relief or dismissal, as well as their reinstated accounting counterclaim, contending that these actions are necessary both to protect their rights and to force meaningful negotiations toward resolution.