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  • Writer's pictureThe San Juan Daily Star

Fiscal board, PREPA creditors battle over security of utility’s $8.5 billion debt

Financial Oversight and Management Board attorney Martin Bienenstock


The Puerto Rico Electric Power Authority (PREPA) creditors and the Financial Oversight and Management Board squared off Wednesday over the security of the utility’s $8.5 billion bonded debt, a litigation that has serious ramifications in the public utility’s bankruptcy process.

The dispute came after oversight board lawyer Martin Bienenstock revealed at a Title III court hearing that it may reach agreements with additional creditors before a deadline this Friday to object to PREPA’s disclosure statement even though mediators have said that no mediation has taken place. The oversight board is negotiating to settle PREPA’s debt with insurer National Public Finance Guarantee Corp. It has reached an agreement with fuel line lenders.

While Bienenstock did not reveal the identity of the creditors that could settle their debt, a lawyer for the Ad Hoc Group of PREPA bondholders said the group is not one of them.

The oversight board has said bondholders have no security over PREPA’s revenues. It has asked the court to declare that under the 1974 Trust Agreement the bondholders’ security interest in the utility’s property is limited to funds deposited in a “sinking fund” and “subordinate funds,” which have between $8 million and $16 million. A ruling in its favor would make the debt worthless.

Bienenstock repeated his argument that once in bankruptcy, the debt is only backed by the amount in a sinking fund and related subordinate funds, and that no remedies exist. He said the authority can not be forced to put money in accounts to pay bondholders.

“Bondholders would now like in hindsight greater protections in the event PREPA found itself in bankruptcy, but that’s not a reason not to interpret the language as is,” Bienenstock said.

Lawyers for the Ad Hoc Group of bondholders, insurers Syncora Guarantee and Assured Guaranty, and bond trustee US Bank National Association argued that the trust agreement grants a lien in favor of the bondholders, requiring PREPA to put money in accounts of the bondholders’ trustee to pay the bonds.

Ad Hoc Group attorney Thomas Moers Mayer said any ruling stating bondholders could have no lien on future revenues, as the oversight board wants, “would invalidate every revenue bond in this country under every Chapter 9.”

Syncora attorney Susheel Kirpalani argued that the oversight board is improperly trying to use the stay to get the debt discharged. He said the claim can only be discharged at plan confirmation.

The debt is protected not only by the trust agreement, but by the law, Kirpalani argued. He noted PREPA is limited legally until the oversight board can make a case about how much it can or can not pay.

The Unsecured Creditors Committee, the Puerto Rico Fiscal Agency and Financial Advisory Authority, and fuel line lenders also provided arguments against the bonds being secured.

The Ad Hoc Group of PREPA bondholders said PREPA’s proposed debt adjustment plan contains worse terms than those contained in plans discussed in the past, and so it may not be able to reach an agreement with PREPA.

U.S. District Court Judge Laura Taylor Swain, who is overseeing Puerto Rico’s bankruptcy cases, said she will meditate on the arguments presented at the hearing and reserved a decision for later. She said she hopes all stakeholders can engage in serious and good faith negotiations. The next hearing is on Feb. 28 to discuss the disclosure statement.

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