Bondholders of the Puerto Rico Electric Power Authority and other parties are arguing about the bondholders' $3.7 billion or more administrative expense claim against the authority.
Since the start of the PREPA bankruptcy in July 2017, "PREPA has consumed billions of dollars of funds that, for years, it reported as 'net revenues' under the trust agreement," the bondholders said in their filing. "These net revenues were the bondholders' collateral. The bondholders are entitled to an administrative expense claim for PREPA's depletion of this collateral."
Puerto Rico's Fiscal Agency and Financial Advisory Authority, which represents the government, and the Unsecured Creditors Committee filed statements Friday opposed to PREPA bondholders' claim. The Puerto Rico Oversight Board filed its statement on the matter in late April in a sealed "debtor's objection" to the bondholders and remain private.
"Judge [Laura Taylor] Swain's decision is crucial for the future of PREPA," said Puerto Rico Attorney and commentator John Mudd. "So far, she has never decided in favor of bondholders but I believe the only way to a consensual resolution of the Title III [bankruptcy] is to show the board it may lose the case."
FAFAA said PREPA needed the money to maintain itself. Contrary to the bondholders' argument, PREPA has been short on cash, as recently as April, FAFAA added.
The UCC said if PREPA fails to turn over net revenues, the trust agreement gives the bondholders "present and future" net revenues and not past net revenues.
The committee said even if bondholders proved diversion of net revenues, it would not prove "diminution" of their collateral. They would need to show the authority's use of net revenues impaired the bondholders' interest in repayment — "an allegation the bondholders never make." The bondholders acknowledge the money was used for PREPA, the committee said.
The bondholders can't argue for diminution because they say future net revenues more than cover what they are owed, the committee said.
The bondholders cannot make a Fifth Amendment claim on any net revenues that may or may not have existed because to the extent they did, they only had a "security interest" and didn't own them, the committee said.
While PREPA's monthly operating reports for several years after the bankruptcy filing mention net revenues, they were "inconsistent" with the audited financial statements, the UCC said.
PREPA bondholders, in their filing in early April,
The First Circuit Court of Appeals has
The bondholders asked for at least $3.7 billion for administrative expense claims, "the amount of net revenues PREPA has accumulated and improperly consumed since the [bankruptcy] petition date."
The bondholders argued that under section 503(b) of the bankruptcy code, when a debtor derives post-petition benefits from the use of a party's property, the party is entitled to an administrative expense claim equal to the post-bankruptcy benefit.
The bondholders argued the bankruptcy's stay on their taking activities found in the trust agreement has led to a diminution of the value of their collateral.
The bondholders said they were appealing to the U.S. bankruptcy code and to the Puerto Rico Oversight, Management and Economic Stability Act to back up the administrative expense claim.
The bondholders say the board has, in any case, impeded their rights under the trust agreement.
For over 20 years PREPA has acknowledged that capital expenses and subsidies like PREPA's contributions in lieu of taxes were not current expenses and yet the board and other parties are trying to argue the opposite now, the bondholders said.
GoldenTree Asset Management, Assured Guaranty, Syncora Guarantee, National Public Finance Guaranty Corp., the PREPA Ad Hoc Group, U.S. Bank N.A. operating as the bond trustee together submitted the non-consenting bondholders' argument.
