The San Juan Daily Star
Judge Swain rules in favor of fiscal board in dispute with bondholders over PREPA debt claims
By The Star Staff
U.S. District Court Judge Laura Taylor Swain ruled Wednesday that payment of the $8.4 billion Puerto Rico Electric Power Authority (PREPA) bonded debt is not secured by a 1974 trust agreement, noting that bondholders have an unsecured claim against the utility to be liquidated by “reference to the value of future net revenues.”
The ruling was part of an adversary proceeding between U.S. Bank National Association as Trustee, the Ad Hoc Group of PREPA Bondholders, Assured Guaranty Corp. and Assured Guaranty Municipal Corp., National Public Finance Guarantee Corp. and Syncora Guarantee Inc. against the Financial Oversight and Management Board seeking a judgment that the $8.4 billion in PREPA bonds was secured by the utility’s 1974 trust agreement. PREPA has been in bankruptcy since 2017 to restructure its almost $10 billion debt.
The oversight board as part of the case wanted a determination from the court seeking a disallowance of the bonded debt to the extent that it purports to be secured by any PREPA property aside from certain moneys currently deposited in a so-called Sinking Fund, which is a fund created by the trust agreement, and a limited number of certain other funds explicitly made subject to liens by the terms of the trust agreement. The bondholders, in turn, contended that they have a claim for the face amount of the bonds that is secured by all of PREPA’s current and future revenues, to which they can look for payment in perpetuity.
A reaction from the oversight board could not be obtained as of press time.
The court heard oral arguments with respect to the cross-motions at a Feb. 1 omnibus hearing. In brief, the oversight board and the bondholders have cross-moved for summary judgment with respect to the allowance or disallowance of $8.4 billion.
The court held that the trust agreement granted the bondholders security interests only in monies actually deposited in the Sinking Fund, Self-insurance Fund, Capital Improvement Fund, Reserve Maintenance Fund, and Construction Fund, as defined in the trust agreement.
Swain also ruled that the bondholders have perfected their liens in the Sinking Fund, Self-insurance Fund and Reserve Maintenance Fund, over which the trustee had established control. However, the judge said the bondholders have no security interest in the covenants and remedies provided for by the trust agreement.
“But based on PREPA’s payment and equitable relief covenants in the Trust Agreement, the bondholders have an unsecured claim to be liquidated by reference to the value of future Net Revenues that would, under the waterfall provisions of the Trust Agreement and applicable non-bankruptcy law, have become collateral upon being deposited in the specified funds and payable to the bondholders over the remainder of the term of the bonds (the Unsecured Net Revenue Claim),” the court ruled.
In making her judgment, Swain noted that the language in the trust agreement did not support the bondholders’ contention that the bonded debt was fully secured.
“The Court finds the Bondholders’ expansive view of their lien rights inconsistent with the clear and unambiguous terms of the Trust Agreement. … Under the terms of the Trust Agreement, as corroborated by the definition of ‘Opinion of Counsel’ in section 101, PREPA did not pledge payment out of gross revenues or an unlimited ‘all revenues,’ but instead covenanted to pay the Bonds out of the ‘Net Revenues’ of PREPA ‘in the manner and to the extent hereinabove particularly specified’ — in other words, subject to all of the payment provisions and limitations of liability contained within the previous sections of the Trust Agreement,” the judge said.
Swain directed the parties to meet and confer and file a joint report no later than seven days stating their positions on the nature, scope, and scheduling of further proceedings that they may believe are necessary in connection with the further resolution of the adversary proceeding. The joint report will identify what discovery issues, if any, remain to be resolved in light of the opinion and order
She also directed them to commence working with the mediation team immediately in good faith efforts to consensually resolve the outstanding disputes concerning the proposed Plan of Adjustment.
Gov. Pedro Pierluisi Urrutia said Swain’s decision validates his remarks that the past debt agreement with PREPA bondholders was not reasonable for Puerto Rico and that it was the right thing to withdraw it.
“In addition, it also validates that what is ordered to be paid through the new adjustment plan approved by the court must be reasonable for PREPA and its customers,” the governor said. “We will continue fighting for PREPA to come out of bankruptcy and looking after our people so that they can have reliable and affordable electricity service.”