Fiscal board defends PREPA’s debt deal from claims it is unconfirmable, illegal
By The Star Staff
The Financial Oversight and Management Board is defending the Puerto Rico Electric Power Authority’s (PREPA) third amended debt adjustment plan from allegations by bondholders that it is patently unconfirmable and violates the Bankruptcy Code.
In a motion filed late last week, the oversight board said the plan distributes to creditors all consideration PREPA can sustainably service under the 2023 Fiscal Plan and provides creditors with better recoveries than they would obtain outside Title III bankruptcy.
A recent study conducted by economist José Caraballo Cueto has concluded that the proposed adjustment in the electricity rate to cover the payment of the restructured PREPA debt will have dire consequences for the business sector in Puerto Rico. The study, commissioned by the Selectos supermarket chain, notes that if adjustment in the rate is approved to cover the proposed payment to PREPA bondholders, there will likely be more increases in food prices, significant job losses, and a potential bankruptcy of 180 businesses.
The oversight board, however, said that because monies for debt service can only come from increasing electricity rates, the debt adjustment plan (DAP) requires a “Legacy Charge” calculated to avoid losses of business and residential customers due to, among other things: accelerating conversions to solar, rendering PREPA’s rates uncompetitive, and rendering PREPA’s rates unaffordable to a population with a poverty rate of some 40 percent.
“In this manner, the Plan maximizes recoveries to creditors while ensuring PREPA’s future as a fiscally sustainable entity that can provide reliable services to its customers and can access capital markets,” the oversight board. “The Third Amended Plan also builds on the consensus from prior plans. It enjoys the support of at least four material impaired accepting classes, representing approximately $4.2 billion in asserted claims, and currently comprising holders of approximately 40% of all PREPA bond claims.”
Consistent with the oversight board’s desire to achieve broad support, the DAP, the board said, provides all bondholders the opportunity to settle their claims, including appeal rights, in exchange for increased recovery. The DAP, which would restructure some $9 billion in bonded debt, also honors settlements at higher recovery levels with creditors that settled their asserted secured debt and provides a suitably lower recovery for those who settled or will now settle their asserted claims after the Lien and Recourse Opinion and Claim Estimation Order.
“For those bondholders that would rather litigate than settle, the Plan provides alternate treatments consistent with their legal rights in different litigation outcomes,” the oversight board said. “Any increase in the allowed bond claims as a result of appeals will not increase overall plan consideration.”
The oversight board said PREPA did not lower the amounts it is offering to pay as a result of the ruling valuing the recourse bond claim at $2.388 billion, rather than the initially asserted $8.4 billion. To account for the possibility PREPA can afford to pay creditors more because it outperforms the 2023 Fiscal Plan forecasts, the DAP provides creditors with a contingent value instrument (CVI) for revenue outperformance, and also provides bondholders with a CVI for savings outperformance.
The DAP is thus designed to ensure maximization of creditor recoveries within the sustainable limitations of PREPA’s rate base, the oversight board said.
The board also insisted the Supplemental Disclosure Statement provides adequate information to parties, containing more than 500 pages of comprehensive information, tables and charts, as well as hundreds of pages of exhibits.
Regarding objections to the effect that the offer to bondholders violates the bankruptcy code because some bondholders will get higher recoveries, the oversight board said objectors simply ignore or gloss over key facts.
“In a nutshell, objecting bondholders ignore that the main reason for their recoveries being less than those of settling bondholders is they are not releasing their appellate rights and therefore not being paid for releasing them,” the oversight board said. “Likewise, Objectors fail to recognize that the bondholders receiving higher recoveries are receiving them because they settled before the Court issued its Lien and Recourse Opinion and Claims Estimation Order. Objectors also ignore the value settling bondholders provide by locking their bonds into the settlement.”
Regarding objectors’ complaint about some parties receiving more in bonds in exchange for cash through the Forward Delivery Bond Purchase Agreement than they contend is a market price, the oversight board said that while objectors complain about the 7% interest rate on certain bonds, they do not mention the Forward Delivery Bond Purchase Agreement is enforceable against the purchasers, and interest rates can and have increased materially in that time.
“To a large degree, Objectors simply express non-buyers’ remorse,” the board said. “They could have settled and been part of arm’s-length bargaining over fees, but determined not to settle.”
Bondholders’ objections that the DAP “unfairly discriminates” against them are nothing more than sour grapes masquerading as righteous indignation,” the oversight board reiterated. “Their characterization of the National and First Bond Settlement Agreements as “sweetheart side deals” designed to “buy votes” conveniently omits the fact that the National and First Bond Settlement Agreements were entered into before both the Lien and Recourse Opinion and the Claim Estimation Order, while GoldenTree, Syncora and Assured chose to litigate against PREPA, the oversight board said.