Judge orders parties in PREPA bankruptcy to prepare arguments on a fiscal board request
By The Star Staff
U.S. District Court Judge Laura Taylor Swain has ordered briefs and oral arguments on the Financial Oversight and Management Board request to start litigation against Puerto Rico Electric Power Authority (PREPA) bondholders after negotiations toward a new debt deal for the power utility fell through.
A litigation schedule proposed by the oversight board would carry the legal disputes through the remainder of 2022, including the trial on its merits. The judicial process would end by April 2023, according to the calendar suggested by the oversight board.
Swain, who is presiding over Puerto Rico’s Title III bankruptcy cases, including that of PREPA, asked for responses to the oversight board’s request to be filed today. The board must file a reply on Tuesday, and the court will hear arguments on the motion at an omnibus hearing scheduled for Wednesday.
On Saturday, the oversight board announced that it had walked out of the mediation that sought to restructure some $9 billion in PREPA debt due to “substantial disagreements with the mediation parties” and leaving the power utility without a clear resolution on its bankruptcy process. PREPA has been in bankruptcy since 2017. After a prior debt deal agreement fell through, the oversight board has been attempting since April to reach a deal with creditors through a mediation process that included the Ad Hoc Group of PREPA bondholders, the Monolines, the Electrical Industry and Irrigation Workers Union (UTIER by its Spanish acronym), PREPA’s retirement system (SREAEE by its Spanish initials), the Unsecured Creditors Committee (UCC) and the Fuel Line Lenders.
“The Oversight Board’s objective has always been to reach an agreement that would reduce PREPA’s debt to affordable levels,” said the board’s chairman, David Skeel, in a statement. “The cost of any debt repayment would be passed on to PREPA customers, and the Oversight Board analyzed carefully what we can expect the residents and businesses of Puerto Rico to pay for electricity. Electricity rates are a key to Puerto Rico’s economic future.”
Oversight board member Justin Peterson said the board’s decision, which took place as the mediation that would have avoided costly litigation was slated to expire, hurts bondholders and retirees who have been treated shabbily and have not been paid in eight years.
Gov. Pedro Pierluisi Urrutia said in written remarks that his administration could not accept an agreement that could disproportionately impact the pockets of working families in Puerto Rico and hinder economic growth.
“PREPA has to reduce its debt to sustainable levels that its subscribers can pay,” the governor said.
The oversight board asked the court to restart litigation against bondholders to settle differences on some legal issues that had impacted the negotiations toward a debt deal.
The litigation, the board said, will focus on whether the bondholders’ security interest securing their bond claims is limited to money PREPA deposits in accounts the bond trustee created pursuant to the trust agreement governing the issuance of the bonds.
The trust agreement requires PREPA to deposit money into those accounts only after the electrical utility pays its operating expenses. The oversight board argued that the trust agreement limits the bondholders’ security interest to monies in this fund, and that bondholders have no claim against PREPA that is not satisfied by the money currently in the fund.
The so-called “Lien Challenge Complaint” would resolve key issues regarding, among others, whether bondholders have a security interest in PREPA’s revenues other than its monies deposited in the “Sinking Fund,” whether bondholders’ collateral includes a “rate covenant” or such covenants are liabilities of PREPA that cannot be pledged, whether asserted security interest is perfected, and whether bondholders have any allowable unsecured claim and recourse and allowable claims to PREPA’s assets beyond the Sinking Fund, the oversight board said.
The oversight board said it plans to amend the Lien Challenge Complaint to include a count under Bankruptcy Code section 927 to determine the allowability of any unsecured deficiency claim under the bonds.
The rulings will establish the rights of the bondholders, who assert some $8.5 billion in fully secured claims, plus post-petition interest of some $2.5 billion to date.
The bondholders have said they intend to seek dismissal of the Title III bankruptcy case before litigation of the Lien Challenge Complaint. If such a petition for dismissal were approved it would leave PREPA without court protection.
The oversight board asked that the so-called current expense complaints that have been stayed for over two years be decided on the papers without a hearing. On July 9, 2019, the administrative agent and certain fuel line lenders under credit agreements pursuant to which PREPA was a borrower filed a complaint against PREPA, the oversight board, the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF by its Spanish initials), and the U.S. Bank National Association, alleging amounts owed to them constituted “Current Expenses” entitled to payment in full in advance of any recovery to PREPA’s bondholders. PREPA’s retirement system also alleges that amounts owed to them are current expenses that must be paid before payments are made to PREPA’s bondholders.
The oversight board asked that a petition by bondholders to put PREPA under a receiver be stayed pending the resolution of the “Lien Challenge Complaint” because that would help establish the bondholders’ right to a receiver.
“They were concerned about PREPA’s management. But now, full control of PREPA’s transmission and distribution system has been transferred to LUMA Energy, putting an independent, industry-leading operator in place as manager,” the oversight board said. “Likewise, the process is well underway to similarly privatize the management of PREPA’s generation system.”
The UCC agreed with the proposed litigation requested by the oversight board and questioned why the board did not try to litigate before against the proposals from PREPA bondholders to end the bankruptcy.
The proposals “would have spelled disaster for PREPA, PREPA’s ratepayers, and the Puerto Rico economy generally, as it would have saddled PREPA and PREPA’s ratepayers with billions of dollars of bond debt which is simply not owed to the bondholders,” the UCC said.
The UCC insisted the bonds held by PREPA bondholders are secured only by the limited funds in certain specified accounts, or around $8.8 million, and are not entitled to an unsecured deficiency claim because of their non-recourse nature.
The UCC also criticized Peterson for attacking the oversight board, noting Peterson’s prior role as adviser to bondholders in some of the Title III cases.
“Of course, every board member is entitled to his or her opinion, but becoming a de facto representative of a creditor constituency, while attacking fellow board members, is, to say the least, unprecedented,” the group said.
Because of the passage of Hurricane Fiona, the UTIER and PREPA’s retirement system asked the court to hold the litigation in abeyance as lawyers have been unable to consult their clients because they lack power service.