The San Juan Daily Star
Fiscal board filing: PREPA bonds not backed by future revenues
By The Star Staff
The Financial Oversight and Management Board (FOMB) has filed a brief arguing that Puerto Rico Electric Power Authority (PREPA) bondholders are wrong in asserting that their bonds are backed by future revenues from the power utility.
The information is contained in a brief filed Tuesday by the bond trustee in the case FOMB v US Bank National Association.
The Ad Hoc Group of PREPA Bondholders and certain insurers made the argument during a Feb. 1 hearing that the bonds are guaranteed by the Uniform Commercial Code (UCC) and by a floating lien. Typically, a loan would be secured by fixed assets such as property or equipment, but in a floating lien, the underlying assets are usually current assets or short-term assets that can change in value. In this case, the bondholders argued that their bonds had a security interest in future revenues.
The oversight board maintains that the Trust Agreement grants bondholders a lien only in PREPA revenues received by PREPA and deposited into a sinking fund or subordinate funds, which have between $8 million and $16 million, and that bondholders only perfected their lien in the sinking fund and self-insurance fund. The board said bondholders were applying the UCC selectively.
“That is clearly wrong because UCC § 9-203(b)(2) requires the debtor to have the power to transfer rights in the existing collateral, not in future, nonexistent revenues,” the oversight board said in its filing. “The law, therefore, has no comprehension of a present security interest in future property (as distinct from a present promise granting, to be effective in the future, a security interest in future property when it will exist and be owned by the debtor). A security interest cannot attach to an expectancy unless and until that expectancy is itself property.”
The oversight board said the concept of a floating lien also requires collateral to exist before a security lien can attach as mentioned in the UCC.
It “recognizes that a ‘floating lien’ attaches to the ‘future’ or ‘hereinafter-acquired”’ property only if and when that property is actually acquired by the debtor,” the oversight board said.
PREPA has been in bankruptcy since 2017 to restructure some $9 billion in debt.
The bondholders are also disputing the adequacy of PREPA’s disclosure statement. Under the restructuring, bondholders must choose between being in a settling class and one that continues with the current litigation over the security of the bonds. Depending on the ruling of the litigation and the number of bondholders who choose to be in the settling class, settling bondholders will be paid between 50% and 100% of the amount owed, a notice to holders of uninsured bonds said. Litigating bondholders will be paid no more than 52.81%, and as little as 0.21%, depending on the outcome of the litigation and the size of each group.