PREPA bondholders to appeal Swain’s ruling on debt classification

Judge Laura Taylor Swain

A group of Puerto Rico Electric Power Authority (PREPA) creditors is appealing a recent Title III bankruptcy court ruling that their $8.5 billion claim against PREPA is a subordinated debt in the separate commonwealth debt adjustment plan and not entitled to payment.

The PREPA Ad Hoc group -comprised of bondholders who refuse to settle their debt with the utility - monolines GoldenTree Asset Management, Syncora Guarantee, National Public Finance Guarantee Corporation, Assured Guaranty, and U.S. Bank National Association as trustee, announced last week they are appealing a July 22 ruling made by Judge Laura Taylor Swain to the U.S. First Circuit Court of Appeals.

The creditors had hoped their claim would be classified as a general unsecured claim, which would allow them a share in a $575 million reserve intended for certain unsecured creditors in the separate commonwealth debt adjustment plan. However, because the judge ruled their claims are deemed subordinated, they do not qualify for payments under the commonwealth debt adjustment plan.

Although this ruling doesn’t directly affect the bondholders’ claims against PREPA right now, it does pave the way for unsecured creditors of the Commonwealth to finally receive payments after several years of waiting since the judge confirmed the commonwealth debt adjustment plan in 2022.

This situation highlights the difficulties of managing Puerto Rico’s complex five bankruptcies filed under Title III of PROMESA in 2017. Currently, PREPA’s bankruptcy is the only one that remains unresolved.

Judge Swain pointed out that the bondholders did not raise any arguments about the constitutional aspects of their claims against the Commonwealth. If they had, it would have required the court to take a closer look. She mentioned that these bondholders, represented by a team of thirteen law firms, are experienced and chose not to discuss these constitutional issues in their case. Doing so could have caused further delays for unsecured creditors waiting for their claims to be resolved.