PREPA creditors object to ‘unconfirmable’ bankruptcy disclosure statement

A group of Puerto Rico Electric Power Authority bondholders contends, among other things, in objecting to the utility’s bankruptcy disclosure statement, that the plan of adjustment is not feasible and is not in the best interests of creditors.

By THE STAR STAFF

Puerto Rico Electric Power Authority (PREPA) creditors have filed numerous objections to the utility’s bankruptcy disclosure statement, alleging, among other flaws, that the plan of adjustment is “unconfirmable” because it will not generate sufficient revenues to pay debt.

The Ad Hoc group of PREPA bondholders, Syncora Guarantee, Assured Guaranty, bond trustee U.S. Bank National Association and the Unsecured Creditors Committee all filed objections to the disclosure statement, which is the document that explains in layman’s terms the essential information regarding the debt restructuring so creditors can understand its key elements.

The Electrical Industry and Irrigation Workers Union (UTIER by its Spanish acronym), also filed an objection by the Feb. 3 deadline because the disclosure statement makes no mention of the privatization of the operations of the utility and contemplates the rejection of the collective bargaining agreements that require PREPA to maintain PREPA Employees Retirement System as a defined benefit plan. If the federal Title III court determines that PREPA is unable to reject the collective bargaining agreements, the plan of adjustment may not be confirmable or feasible without material amendments.

Among the reasons given by the Ad Hoc Group of PREPA bondholders for rejecting the disclosure statement are: the Financial Oversight and Management Board’s rejection of the 2019 restructuring support agreement done in bad faith, the oversight board’s abuse of power during the mediation process, and that the plan is not in the best interests of creditors, isn’t feasible, contains no valid impaired accepting class, and cannot satisfy so-called cram-down requirements.

PREPA’s debt offer would require bondholders to choose between being in a settling class or litigating whether the bonds are or not secured by utility revenues. Depending on the outcome of the litigation and the number of bondholders who choose to be in the settling class, settling bondholders will be paid between 50% and 100% of the amount owed, according to a notice to holders of uninsured bonds. Litigating bondholders will be paid no more than 52.81%, and as little as 0.21%, depending on the outcome of the litigation and the size of each group.

“The Plan would arbitrarily limit creditors’ total recovery, on the nearly $15 billion that PREPA owes them, to around $5.4 billion (most of it payable over three to five decades). The Oversight Board maintains that it would be unaffordable and unsustainable for PREPA to repay its creditors even a penny more than that sum,” the Ad Hoc Group said. “But the same day the Oversight Board filed its Plan and Disclosure Statement, it publicly released its own recent proposal for PREPA to repay its creditors approximately $7.8 billion.”

Ignoring Puerto Rico’s booming economy and strong financial position following the commonwealth’s exit from Title III and the allocation of billions in federal funds, the Ad Hoc Group said, the oversight board posits throughout the disclosure statement that bondholders should be prepared to recover significantly less from PREPA than they were offered a year ago, and four years ago, and eight years ago.

The creditors noted that information in the disclosure statement is incomplete and unclear. The plan does not address how distributions will be made to creditors in the likely event that litigation necessary to determine distributions remains unresolved for years. Currently, the oversight board is in litigation disputing the claims of bondholders that their bonds are secured by PREPA’s revenues. The board has said they are only secured by an estimated $8 million to $16 million in a sinking fund and other subordinate accounts.

There are other factors, creditors said, that could hold up distributions, including the potential need for the Puerto Rico Energy Bureau (PREB) to approve any proposed legacy charge that will be used to pay creditors.

Regarding the legacy charge, the creditors noted that the disclosure statement does not adequately explain the nature and structure of the legacy charge that will fund the debt service payment, or how the different parts of the legacy charge will be allocated among classes of ratepayers, including individual customer class charges and aggregate charges.

The debt adjustment plan, they said, offers most creditors Series B Bonds that are effectively unenforceable. They are talking about bonds that would provide payment of their principal and interest only if PREPA sets total rates, including the so-called legacy charge for debt service, high enough to generate revenues sufficient to pay both operating expenses and debt service.

“But the Plan offers no assurance that Series B bondholders can enforce payment of their bonds if PREB fails to approve total rates sufficient to pay all operating expenses and debt service,” the creditors said.

PREPA’s retirement system also objected to the plan for lacking sufficient information as to the fate of the pensions.

“The Disclosure Statement describes the proposed governance of the PREPA PayGo Trust, which requires an initial deposit of one million dollars to fund administrative fees, costs, and expenses, in addition to ongoing funding,” retirement system officials said. “Yet, the only information on where the funding will come from refers to PREPA’s available cash flow generally. This creates doubt as to the source of the funding, and whether it is sustainable or even available; different, for example, from the clear guide to funding sources of bond payments.”