The San Juan Daily Star
Fiscal board says filing a new PREPA debt deal in 60 days is impractical, insists upon litigation
By The Star Staff
The Financial Oversight and Management Board objected late last week to filing a debt adjustment plan in 60 days for the bankrupt Puerto Rico Electric Power Authority (PREPA) as suggested by mediators while it litigates and engages in talks to settle disputes over the power utility’s $9 billion debt.
The oversight board said the suggestion was not practical given its disputes with bondholders and that it needed time to negotiate with other creditors, such as unions and retirees, before filing a nonconsensual plan.
On Sept. 17, the oversight board announced it was walking out of the mediation talks to restructure PREPA’s $9 billion debt due to “substantial disagreements with the mediation parties.” The board then asked the Title III bankruptcy court to restart litigation of several disputes with the bondholders. The litigation will focus mainly on whether the bondholders’ security interest securing their bond claims is limited to about $8.8 million that PREPA has in accounts the bond trustee created per a 1974 trust agreement governing the issuance of the bonds.
The bondholders then asked the court to dismiss the bankruptcy case, which began in 2017, and to appoint a receiver for PREPA.
Following a request from U.S. District Court Judge Laura Taylor Swain, who is overseeing all of Puerto Rico’s bankruptcy cases, the mediators presented a schedule to continue negotiations during the litigation proposed by the oversight board and the creation of a new debt adjustment plan.
The mediators said they believe the mediation will benefit if the court requires the oversight board to file in 60 days a proposed plan of adjustment, or “toggle plan,” and a related disclosure statement that contemplates alternative plan treatment depending on the outcome of the primary lien and claim disputes.
They also said it would enhance the mediation if the litigation takes place as part of the oversight board’s request for confirmation of the debt plan and a confirmation hearing consistent with an expedited litigation schedule. The hearing should take place no later than June 2023, they said.
The oversight board on Friday said the mediators’ suggestion was problematic for several reasons. First, the bondholders claim they are owed $8 billion without the interest accumulated after the bankruptcy filing and $10.5 billion with interest.
“If any material portion of the $8 billion claim is not allowable, it dramatically impacts what PREPA will pay for all other allowed claims,” the oversight board said. “There are too many potential outcomes of the Bondholders’ ultimately allowable secured and unsecured claims for there to be a ‘toggle plan.’ We would need multiple toggles!”
While the oversight board said the court may set a deadline for filing a plan, it noted that the Puerto Rico Oversight, Management and Economic Stability Act, commonly known as PROMESA, does not provide for the court to predetermine the plan’s contents, including that it be a “toggle plan.”
The board insisted that the purpose of the requested litigation is to determine the bondholders’ and current expense claimants’ rights, which will help it strike deals with those creditors or other groups. The “current expense” claims are those in which fuel line lenders and PREPA’s retirement system said they should be paid before the bondholders.
“Because mediation has taken a staged approach focusing solely on the Bondholders’ claims, the Oversight Board has not had the opportunity to complete its negotiations with PREPA’s unions or retiree system or to meaningfully engage with other creditor constituencies,” the board said. “The Oversight Board should be given the opportunity to reach consensus with other parties before it files a nonconsensual plan.”
The oversight board said it chose the litigation schedule as no debt plan was practicable. Nonetheless, the board said, it could commit to filing a proposed adjustment plan within 45 days of either a restructuring support agreement with a significant creditor constituency or the Title III court’s adjudication of the bondholder’s debt claim.
The oversight board also asked the court to stay litigation involving the appointment of a receiver for PREPA.
The board said it agrees with the mediation team’s suggestion that it should have authority to file reports recommending that the court pause pending litigation to enable negotiations to proceed.
However, it objected to the mediators’ suggestion that all oversight board members should attend all the mediation sessions.
“We understand the Mediation Team might desire to have the Oversight Board attend negotiations so it can respond more quickly to counter-proposals. That is understandable, but the circumstances must be considered,” the board said. “The Oversight Board acts in a deliberative manner with access to its advisors and other experts to consider new points and data raised by creditors, AAFAF [the Puerto Rico Fiscal Agency and Financial Advisory Authority], the Legislature, and the unions. The Oversight Board’s members consider and debate opposing positions. Thus, the Oversight Board sometimes requires more time to act in the best interest of Puerto Rico and all its people and stakeholders.”
The board also objected to a suggestion that it appoint a lead negotiator as it would result in delays and additional costs.
Regarding a mediation team request for the oversight board to set up a data room for economic analyses and financial projections, among other things, the board said it was unnecessary because it has already provided such information to creditors.