Bondholders want any PREPA plan held until after appeals

The latest salvo in the saga of the Puerto Rico Electric Power Authority bankruptcy, bondholders want the proposed plan of adjustment to not take effect until all appeals are exhausted.

Bondholders said in an objection filed with the court that the result of their planned appeal of Judge Laura Taylor Swain's decision against their lien on revenues "could fundamentally alter creditor rights and plan distributions."

Bondholders argued against the Oversight Board's proposed plan of adjustment, saying the authority and the Puerto Rico people could afford to pay more and other arguments.

The Ad Hoc Group of PREPA Bondholders, Assured Guaranty, Syncora Guarantee, retirees, PREPA's main union, and a range of individuals filed objections to the plan of adjustment on Monday to meet a midnight deadline. The Puerto Rico Fiscal Agency and Financial Advisory Authority, which is part of the government of Gov. Pedro Pierluisi, submitted a statement calling for key clarifications.

The Ad Hoc Group of PREPA Bondholders argued the plan was "not confirmable" because it "fails to provide bondholders and other creditors recoveries equal to what PREPA is able to pay," as required by bankruptcy and PROMESA provisions.

In addition to "vastly" understating revenues PREPA could generate, they said, the board's forecasts of future sales are "implausibly depressed."

Another reason the plan can't be confirmed, they say, is it depends on illegal and unreasonable settlements, with National's settlement not available to other bondholders and "an audacious putative settlement of the fuel-line lenders' priority-and subordination dispute with bondholders, a dispute that is not PREPA's or the Oversight Board's to settle."

The plan wasn't proposed in "good faith," they charge, pointing to testimony showing "the Oversight Board's plan-supported analyses are made-to-order, result-oriented fictions designed to justify paying bondholders and other creditors as little as the Oversight Board thinks it can get away with."

FAFAA said it was concerned the proposed charges to support the debt service payments "will overly burden Puerto Rico's residents and businesses."

Puerto Rico Attorney John Mudd said, "FAFAA was very careful to support the plan but at the same time voiced concern about the increase in rates."

He said FAFAA's "continued insistence that Puerto Rico Energy Bureau is the only one that can establish rates, incorrect given the case law, is a way of insulating the government from a rate hike." 

Mudd noted the resurrection of "the argument that Puerto Rico Oversight, Management, and Economic Stability Act is non-uniform bankruptcy law and therefore unconstitutional."

While Swain is unlikely to accept it, he said, it may be winnable in the First Circuit Court of Appeals or the Supreme Court, he said.

"The real question is whether Judge Swain will approve a plan of adjustment with only 10% support or will she dismiss the Title III [bankruptcy]," Mudd said.

The Oversight Board told The Bond Buyer it would respond to the bondholders' arguments in court.

FAFAA, which is led by Executive Director Omar Marrero, said it rejected the use of Puerto Rico central government money to support PREPA's creditors. The government has provided $1.2 billion to support PREPA's obligations in the transmission and distribution agreements and the plan says the central government is to "buy $400 million in administrative expense bonds."

The proposed plan and order can be seen as having the court "require" the Puerto Rico Energy Bureau to approve the board-proposed debt service charge for PREPA, FAFAA said. The documents are "problematic" and the board has recognized PREB's independent role in rate setting.

PREB must not be forced to "rubber stamp the [debt service] legacy charge," even though it will act "with reference" to the court's determination of "debt obligations," FAFAA said. The court should clarify PREB's role.

Puerto Rico Clearinghouse Principal Cate Long said, "The most important issue is that National [Public Finance Guarantee] is provided a recovery near par on their bonds while the Oversight Board wants to pay other bondholders, with the same paper approximately 21% recovery."

She called it "unfair discrimination," barred under the bankruptcy code, making the plan unconfirmable.  

"The second most important issue, in my opinion, is that both the Ad Hoc Group of Bondholders and Assured say in their filings they will appeal the PREPA lien decision which makes it difficult to make a plan effective even if it was confirmed," Long said. "It is likely that bondholders would have to post a substantial bond on appeal."