Judge says $2.4B available for PREPA bondholders

The judge in the Puerto Rico Electric Power Authority said the bondholders should get about 28.4% of par value of debt and interest outstanding, largely in line with a figure the Oversight Board said was available.

U.S. District Court Judge Laura Taylor Swain on Monday set a bond claim value of about $2.405 billion. This was a first step to determining how much money should be awarded to bondholders in the plan of adjustment. The bond claim consists of $2.388 billion in unsecured net revenue claim and $17 million in PREPA sinking fund funds on which the bondholders have a lien.

Based on that amount, and allowing for payment of the comparatively generous deal for National Public Finance Guarantee, the non-settling bondholders would be guaranteed about 12.7% recovery plus two contingent value instruments. The Oversight Board has already reached a deal with NPFG and it would almost certainly be part of any plan of adjustment Swain approves.  

The Ad Hoc Group of PREPA Bondholders did not respond to a request for a comment.

On Tuesday afternoon this group, Assured Guaranty, Syncora Guarantee, and bond trustee U.S. Bank N.A. asked Swain to certify their appeals of her decisions to the U.S. Court of Appeals for the First Circuit. In early May Swain denied a similar request.

Swain scheduled a meeting Wednesday for PREPA and its creditors to discuss the timetable for a confirmation hearing on the plan.

Puerto Rico Attorney John Mudd said, "Swain will approve the new plan of adjustment when it is filed. The question is what the appellate court will do."

Swain's valuation of the bond claim was extremely close to the board's declaration Friday that $2.383 billion was available for the payment of bonds, despite Swain using a different path to arrive at it.

Her calculation estimated how much, in net present value terms, the bondholders could have gotten if they sought a receiver after the July 2017 bankruptcy and controlled the authority for the next 100 years. The board estimated the amount available to pay bondholders over the next 35 years.

Swain agreed with the bondholders that Puerto Rico law should guide the estimate, but in all other matters took an approach from the Oversight Board or adopted an approach more negative for bondholder recoveries than that of the board.

Swain ruled that board expert David Plastino's repayment plan was more appropriate than the bondholders' expert.

Plastino's plan "contemplates a net revenue stream that is set to be derived and paid through a method that should be relatively affordable for ratepayers, reflects the impact of system maintenance and improvements that will be required to keep the system generating revenues over a lengthy period, and includes a present value discount factor for the time value of money and general market perceptions of risk," Swain said in her ruling.

Puerto Rico Clearinghouse Principal Cate Long said, "the estimate [Swain] used from Plastino includes 'additional pension' and 'additional capex' reductions. This violates the 'waterfall' in the trust agreement which she does not address. That would appear to be an error of law and appealable."

In this context, "waterfall" is a term explaining how legal documents determine the order of use of money. Long said the Trust Agreement says bondholders should be paid before capital expenditures, but Swain allows spending on capex before the bondholders are paid.

Long also said the Trust Agreement allows for payment of currently due amounts for pensions but Swain allows covering unfunded pension liabilities. This would also violate the PREPA Trust Agreement waterfall that Swain said her scenario would follow.

In March Swain had ordered a claim estimation process to figure out how much bondholders would likely have received if after PREPA was put into bankruptcy in March 2017 there was no stay on litigation and the bondholders had sought a receiver.

In her decision Monday, Swain said the bondholders' expert Maureen Chakraborty assumed it was inevitable that a receiver would have been appointed and she failed to pay attention to language in the trust agreement that said any rates imposed by a receiver would have to be "just and reasonable."

Swain said she found Plastino's methodology "persuasive."

Despite the arguments by Assured Guaranty's lawyer that Swain's scenario was a hypothetical one that must assume the non-existence of the board and the Puerto Rico Oversight, Management, and Economic Stability Act, Swain said the scenario should assume those things existed. These things along with the Puerto Rico Energy Bureau, which regulates electric rates, would have been challenges to the bondholders' receiver, if one had been put in place, she said.

Swain said the bondholders' expert on receivership, John Young, appeared to know little about PREPA and painted a picture of his experiences as Jefferson County, Alabama, utility receiver that lowered her belief that with a receiver bondholders could generate the money to pay off their bonds.

Given the risks that a receiver would face, she set a 20% reduction on the computed value of the unsecured net revenue claim in determining its present value.

Swain said there was a possibility that a receiver would never have been appointed or, if appointed, may have raised much less revenue than expected. To account for these risks, she included the 20% reduction in her calculation of the $2.388 billion unsecured net revenue claim for the bonds.