The appeals court’s July 22 decision came after the Financial Oversight and Management Board had asked for a reconsideration of the ruling as part of PREPA’s bankruptcy case.
By The STAR STAFF
The U.S. First Circuit Court of Appeals has decided to review its prior ruling that holders of Puerto Rico Electric Power Authority (PREPA) bonds have a secured claim of $8.5 billion against the utility’s current and future net revenues.
The appeals court’s July 22 decision came after the Financial Oversight and Management Board had asked for a reconsideration of the ruling as part of PREPA’s bankruptcy case.
“Pursuant to Federal Rule of Appellate Procedure 40(a)(3), the parties to this appeal other than the Board and the Committee of Unsecured Creditors should file any response to the pending petitions for rehearing on or before August 2, 2024. The Board and the Committee may file replies of no more than five pages on or before August 9, 2024,” the Appeals Court wrote.
On June 12, the Appeals Court, in a 66-page opinion, examined various issues, such as trust obligations and revenues, to declare that bondholders will receive the face amount of bonds, about $8.5 billion, and accrued interest.
The First Circuit’s decision could affect bondholder recoveries and the confirmation of PREPA’s debt adjustment, which Judge Laura Taylor Swain is currently considering. The decision also has implications for the broader municipal bond markets. The FOMB had anticipated it was going to seek a reconsideration of the Appeals Court ruling.
“PREPA does not generate any net revenues until electricity rates are increased. Under bankruptcy law, the court must determine the value of the bondholders’ collateral on the confirmation date, which is prior to any rate increase. Therefore, the implications of the First Circuit decision and the value of the bondholders’ collateral will depend on careful consideration and additional determinations by the U.S. District Court,” the FOMB said.
In January, PREPA’s bondholders asked an appeals court to overturn a Swain’s ruling that found they had only a $2.4 billion unsecured claim on their $8.5 billion debt.
In 2023, Swain ruled that the bonds issued by PREPA gave bondholders security interests under the utility’s trust agreement only in money received and deposited into a fund rather than a security interest in future revenues not yet received for energy not yet generated. She also declared that bondholders had an unsecured claim to net revenues that the Judge reduced from about $9 billion to $2.4 billion.
In its June 12 opinion, the First Circuit Court confirmed that the trust agreement’s “preamble” functioned as a granting clause rather than a prefatory clause, indicating PREPA’s unequivocal promise to pledge revenues as security for bond payments.
The Appeals Court also declared that PREPA pledged net revenues as security for the revenue bonds, extending the security interest beyond the funds deposited into specific accounts such as the sinking and subordinate funds. It said a revenue lien could encompass revenues acquired in the future, extending security interests to after-acquired property.
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