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  • Writer's pictureThe San Juan Daily Star

Fiscal board evaluates impact of appeals court ruling on PREPA’s bankruptcy



Rep. Víctor Parés Otero

By The Star Staff


The Financial Oversight and Management Board is reviewing this week’s decision by the U.S. First Circuit Court of Appeals that ruled Puerto Rico Electric Power Authority (PREPA) revenue bonds are secured by utility revenue.


The 66-page opinion examined various issues, such as trust obligations and revenues, to declare that bondholders will receive the face amount of bonds, about $8.5 billion, and accrued interest.


The oversight board said it is also analyzing the impact, if any, of the ruling on PREPA’S proposed Plan of Adjustment, which the federal Title III bankruptcy court has yet to confirm.


“The Oversight Board is gratified that the First Circuit ruled the bondholders’ claims are non-recourse and limited to payment from collateral, namely net revenues,” the oversight board said.


The First Circuit left it to the U.S. District Court to determine how the ruling would impact the confirmation of the Plan of Adjustment.


“PREPA does not generate any net revenues until electricity rates are increased. Under bankruptcy law, the court must determine the value of the bondholders’ collateral on the confirmation date, which is prior to any rate increase,” the oversight board said. “Therefore, the implications of the First Circuit decision and the value of the bondholders’ collateral will depend on careful consideration and additional determinations by the U.S. District Court.”


In January, PREPA’s bondholders asked an appeals court to overturn a ruling that found that they had only a $2.4 billion unsecured claim on their $8.5 billion debt.


In 2023, the U.S. District judge overseeing PREPA’s bankruptcy, Laura Taylor Swain, 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. She also declared that bondholders had an unsecured claim to net revenues that the court reduced from about $9 billion to $2.4 billion.


In its opinion, issued Wednesday, the First Circuit court confirmed that the “preamble” functioned as a granting clause rather than a prefatory clause, indicating PREPA’s unequivocal promise to pledge revenues as security for bond payments.


The court also declared that PREPA pledged net revenues as security for the revenue bonds, extending the security interest beyond the funds deposited into specific accounts such as the sinking and subordinate funds. It said a revenue lien can encompass revenues acquired in the future, extending security interests to after-acquired property.



NPP lawmakers urge board to appeal ruling


On Thursday, the New Progressive Party Minority Leader in the island House of Representatives, Carlos “Johnny” Méndez Nuñez, along with San Juan District 4 Rep. Víctor Parés Otero, asked the oversight board to appeal the Boston appeals court ruling to the U.S. Supreme Court.


“This determination was not what was expected, even more so when we are still in the Title III process with PREPA where Judge Laura Tylor Swain is evaluating the restructuring of the public corporation with a repayment base of $2.5 billion. If this other scenario materializes -- $8.5 billion -- it would imply an unprecedented impact on consumers’ bills,” Parés Otero said. “We cannot allow that, that is why we call on the board and the government to go to the federal Supreme Court to request an appeal of this disastrous decision for Puerto Rico.”


The decision of the appellate forum, the lawmakers noted, indicates that the bondholders’ claim is not guaranteed and is limited to a “collateral payment,” which is nothing more than indicating that it will come from PREPA’s net profits.


“PREPA’s net gains were realized with an increase in rates for individuals and businesses,” Méndez Nuñez said. “This decision opens the doors for a significant adjustment in rates, a very heavy blow to the pockets of our people. That is something we cannot allow. We [...] urge the board and the government, through the Fiscal Agency and Financial Advisory Authority [AAFAF] to carefully evaluate going to the Supreme [Court] to avoid what would clearly be a historic blow [for] our people.”


“According to the decision, after everything is paid, the surplus that is in PREPA accounts will be used to pay a debt of approximately $8.5 billion that is devastating for Puerto Rico,” Parés Otero said. “That is why we urge concrete and proactive actions such as elevating this to the Supreme Court.”

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