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  • Writer's pictureThe San Juan Daily Star

PREPA’s pretrial conference will shuffle through mounting exhibits, evidence

U.S. District Judge Laura Taylor Swain

By The Star Staff

The pre-trial conference to determine evidentiary issues and the admission of exhibits related to the confirmation of the Puerto Rico Electric Power Authority’s (PREPA) debt adjustment plan is scheduled for Tuesday.

At stake is not only evidence on whether PREPA’s debt adjustment plan should be confirmed next month, but also the impact of the plan, which would cause dozens of local laws to be preempted, result in a legacy charge in customers’ power bills and diminish the Puerto Rico Energy Bureau’s power to determine rates.

On Feb. 16, the Financial Oversight and Management Board filed a modified Fourth Amended Title III Plan of Adjustment for PREPA. Next month, the federal Title III court will be holding hearings to determine if the plan should be confirmed.

In addition to submitting hundreds of pieces of evidence and expert testimony on the viability of the plan, stakeholders have also presented numerous objections.

PREPA bondholders Golden Tree Asset Management and Syncora Guarantee have asked that most creditor votes be disqualified, including fuel line lenders, the Unsecured Creditors Committee, and a settlement reached with National Public Finance.

PREPA bondholders opposing the plan have not only argued that PREPA can pay more of its $9 billion debt, but also that the oversight board is manipulating the classification of claims to gain approval of the plan.

The debt adjustment plan “rests on a series of purported settlements that bestow premium recoveries on certain favored creditors with the purpose of gaining support for the plan,” the bondholders said.

For instance, they said Vitol’s general unsecured claim will be allowed in the aggregate total amount of $41.4 million and classified separately from other general unsecured claims asserted against PREPA. Regarding the effective date of the plan, Vitol’s claim will be paid a distribution on account of its claim equal to one-half the percentage recovery to other general unsecured creditors. The bondholders noted that shortly after the settlement with Vitol, the oversight board informed the court that it had procured “an impaired accepting class, thus enabling it to file a confirmable plan rather than a placeholder.”

In December 2022, the board reached an agreement with the fuel line lenders. The bondholders said that after initially rejecting the fuel line lenders’ priority claim, the oversight board later accepted it after creating an impaired accepting class. Under their settlement, the fuel line lenders will receive first priority Series A Bonds in a principal amount of some $650 million with a 15-year stated final maturity and 6% cash interest coupon, post-petition interest accrual and $15 million in consummation fees, and professional-fee reimbursement of up to $11 million.

“The fuel line lenders remain the only creditors receiving the senior Series A Bonds and the associated 92%-plus recovery even though the Bondholders and the fuel line lenders all are unsecured creditors,” the bondholders said.

The Electrical Industry and Irrigation Workers Union (UTIER by its Spanish acronym) and PREPA’s retirement system have insisted that the oversight board can neither legislate nor repeal existing laws. For that reason, they say, the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) mandates that the board obtain regulatory approval and enabling legislation for the implementation of the debt adjustment plan.

While PROMESA contains an express preemption clause, the section only preempts “general or specific provisions of territory law, state law, or regulation” that are inconsistent with PROMESA’s text.

“It cannot be interpreted in such a broad manner as to preempt any and all state laws,” UTIER and the retirement system said. “Therefore, before a state law can be deemed preempted by PROMESA, there must be an analysis regarding whether and how that state law is inconsistent with PROMESA and its provisions, which is the domain expressly preempted.”

The debt adjustment plan is slated to preempt sections of the Puerto Rico Electric Power Authority Act, the Puerto Rico Labor Relations Act, the Puerto Rico Net Metering Program Act, the Puerto Rico Transformation and Energy RELIEF Act, the Puerto Rico Electric Power Authority Revitalization Act, the Act to Guarantee the Payment of Pension Benefits to Retirees and to Establish a New Defined Contribution Plan for Public Servants, the Puerto Rico Energy Public Policy Act, and the Puerto Rico Debt Responsibility Act. The preemption of the selected provisions of those laws is either permanent or until the eventual repayment of debt issued in the plan of adjustment.

While the bankruptcy process moves along, the bondholders are waiting on a ruling on an appeal filed against U.S. District Judge Laura Taylor Swain’s decision last year concerning the validity and scope of the bondholders’ lien rights.

Swain held that bondholders’ collateral is limited to monies in a “Sinking Fund” created for debt service under the Trust Agreement, and certain other designated funds. The court held that the aggregate allowed amount of bondholders’ claims is $2.4 billion, or some 28.2% of the face amount in debt.

Meanwhile, the oversight board has signed a contract with BGC Partners Advisory to obtain advice on the debt adjustment plan. The firm will be paid $850,000 per month.

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