Oversight Board, bond insurers battle for PREPA control

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Both the Puerto Rico Oversight Board and four bond insurers have taken steps to gain, or regain, control over the Puerto Rico Electric Power Authority.

The board released a statement Thursday evening saying that a cut in PREPA rates announced by the governor is “inconsistent” with “the information and data that has been provided by PREPA about its liquidity, operational expenses, fuel costs, and revenue projections.”

Four bond insurers filed a motion Wednesday asking to be allowed to name a receiver of PREPA, after an appeals court bolstered their case in August.

National Public Finance Guarantee Corp., Assured Guaranty Corp., Assured Guaranty Municipal Corp., and Syncora Guarantee Inc. filed the motion in U.S. District Court for the District of Puerto in PREPA’s Title III bankruptcy case.

The insurers along with a handful of investment funds with major holdings in PREPA had first filed a motion in the Puerto Rico District Court for a receiver in July 2017. In September 2017, Title III Judge Laura Taylor Swain issued a ruling saying she had no right to appoint a receiver and questioned wisdom of doing so.

The insurers appealed the ruling to the First Circuit Court of Appeals and in August a three-judge panel rejected nearly all of Swain’s arguments.

After National filed its motion Wednesday, National said in a written statement to the press PREPA has a long history of being politicized by the local government, of being overstaffed, and of being led by incompetent leaders.

“It is inconceivable that PREPA can transform itself or attract the necessary private investment to do so under the current circumstances,” National continued. “An independent receiver will insulate PREPA from political influence, stabilize the company’s operations, and set it on a path for future success. The people of Puerto Rico and all of PREPA’s stakeholders deserve nothing less.”

In her September 2017 decision Swain had pointed to sections 305 and 306(b) of the Puerto Rico Oversight, Management, and Economic Stability Act as barring her from lifting Title III’s automatic stay and appointing a receiver. She also said that an examination of the balance of harms weighed against granting a receiver.

On Aug. 8 a three judge panel for the U.S. Court of Appeals for the First Circuit reversed Swain’s denial of the bondholders request for relief from Title III’s automatic stay and called for “further proceedings consistent with this opinion.”
The appeals judges almost entirely rejected Swain’s arguments based on 305 and 306(b) and her approach considering the value of a PREPA receiver.

PROMESA Section 305 says in part, “Unless the Oversight Board consents or the [fiscal] plan so provides, the court may not, by any stay, order, or decree, in the case or otherwise, interfere with – (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the use or enjoyment by the debtor or any income-producing property.”

The circuit judges said that the plaintiffs were not seeking a stay or other things section 305 bars them from seeking. Rather, the bondholders and insurers were seeking the Title III judge to lift the stay and allow a local Puerto Rico judge to rule on appointing a receiver.

The circuit judges said that PROMESA includes section 362(d)(1) of the bankruptcy code and that this section says that courts “shall” provide relief from automatic stay “for cause, including the lack of adequate protection of [a creditor’s] interest in property.”
If 305 were to bar any remedy that would protect the creditors’ collateral, the judges said they’d “doubt” its constitutionality.

“We hold that section 305 does not prohibit as a matter of course the Title III court from lifting the stay when the facts establish a creditor’s entitlement to the appointment of a receiver in a different court in order to protect a creditor’s collateral should that protection otherwise be necessary and appropriate,” the circuit judges wrote.

The judges said, “it might be possible to grant tailored relief for the creditor to seek a receivership provided that the receiver only take specific steps necessary to protect the creditor’s collateral.”

PROMESA Section 306(b) says, “The district court in which a case under this title is commenced or is pending shall have exclusive jurisdiction of all property, wherever located, of the debtor as of the commencement of this case.”

The circuit judges said this was a general rule in bankruptcies and that it has never limited judges’ powers to act on debtor’s property with the judges’ permission. The section merely requires the bankruptcy process to be “ultimately under the prerogative of the Title III court.”

In this way, they said that section 306(b) didn’t prevent Swain from lifting the stay if there was cause.

In her September 2017 decision, Swain had said that even if she believed she had the legal power to lift the stay she would not have done so.

The circuit judges said that Swain had “undertook no assessment of the extent to which any collateral of the bondholders might be irreversibly harmed in the interim, or whether PREPA could demonstrate that it was adequately protecting that interest, factors a court would ordinarily examine and weigh.”

They went on, “Much time has … passed [since Swain’s September 14, 2017 decision], and the situation on the ground – and at PREPA – has changed greatly since last September in the wake of Hurricanes Irma and Maria.”

“We think it best to allow the bondholders to file a new and updated request for relief from the automatic stay so that the parties and the Title III court can focus on the merits of that request free of any thought that the request is categorically precluded.”
The bond insurers filed that request on Wednesday.
On July 30 the Puerto Rico Oversight Board, PREPA, and bondholders reached a preliminary deal for PREPA's debt in the form of a Restructuring Support Agreement and a term sheet.

There are continuing negotiations to formalize the deal. On Tuesday PREPA posted to the Electronic Municipal Marketplace saying the deadline for completing the deal had been extended to Friday.

On Thursday morning Puerto Rican news web site El Nuevo Día reported that PREPA plans to lower residential rates by about 3.9 cents per kilowatt/hour and by about 3.5 cents per kilowatt/hour. Residents currently pay around 22 cents per kilowatt/hour. The news site attributed the information to Puerto Rico Gov. Ricardo Rosselló and PREPA Executive Director José Ortiz. The rate decreases are planned to start in November.

The officials said the decline would be possible due to the authority achieving lower costs of production with greater use of natural gas, according to El Nuevo Día.

On Thursday evening the Oversight Board requested the governor explain “the legal basis for why the proposed rate reduction would not constitute a rate adjustment that would require regulatory approval by the Puerto Rico Energy Commission, under current commonwealth law.”

The board said it had sent the governor and PREPA executive director requesting information and background data related to the announcement that the rates would be lowered.

“As the independent debt investigation report found, we must ensure PREPA’s rate changes are not politically induced, in order to avoid the pitfalls that caused the fiscal crisis of this utility,” said board Chairman José Carrión.

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PROMESA Puerto Rico Electric Power Authority Commonwealth of Puerto Rico Puerto Rico