The Puerto Rico Title III judge signaled she has misgivings over a motion by bondholders that would open the door to their taking over the Puerto Rico Electric Power Authority as part of the island's debt restructuring.

Judge Laura Taylor Swain’s remarks came during a hearing Wednesday where she also rejected steps to improve the status of holders of the Puerto Rico Sales Tax Financing Corp. (COFINA) bonds and a petition to appoint a committee to represent the interest of Puerto Rico’s municipalities.

At the hearing in the U.S. District Court for Puerto Rico, the PREPA bondholders asked Swain to lift the stay on debt-related litigation found in the Puerto Rico Oversight, Management, and Economic Stability Act. If she did, they told her they would ask the local court system to allow them to appoint a receiver for PREPA, which is the island’s sole electric provider.

Puerto Rico Title III bankruptcy Judge Laura Swain introduced Chief Mediator Barbara Houser on Wednesday.
Judge Laura Swain asked how giving up control to a receiver was consistent with her responsibility for PREPA’s property. U.S. Courts

Swain asked the PREPA Bondholders attorney Greg Horowitz how giving up control to a receiver was consistent with her responsibility for PREPA’s property as manager of the case. Horowitz said that he wasn’t stating anything about ownership of PREPA’s property.

The Puerto Rico Oversight Board in June authorized the Title III court supervised restructuring of PREPA's $9 billion of debt, including $8.3 billion of bonds, even though the utility and its bondholders had agreed to a plan out of court.

Representing the Ad Hoc Group of PREPA Bondholders and several bond insurers, Kramer Levin partner Horowitz complained that the Oversight Board wasn’t recognizing the bondholders’ right to increase the authority’s rates. He said the rights were found in both the bond indentures and in Puerto Rico statute law.

To suspend the bondholders’ right to appoint a receiver and increase electric rates would be to take their collateral, Horowitz said. A judge can’t do that in a bankruptcy, he said. If PREPA’s strong revenue pledge isn’t enforceable now, then no revenue pledges will be enforceable in the U.S., he said.

Oversight Board lawyer Martin Bienenstock responded that Congress put the board in charge over all public bodies in Puerto Rico. There could be no sound management of Puerto Rico’s crisis if there were different managers for different government entities.

Bienenstock said that Swain couldn’t hand PREPA to a receiver without losing jurisdiction in the case. Bienenstock is a partner with Proskauer Rose LLP.

"Judge Swain had reservations on whether PROMESA allowed her to do what is being requested," said attorney John Mudd in an email. "She did not seem convinced of what bondholders claim. We will have to wait for the ruling." Mudd represented the municipality of San Sebastián in another matter before Swain on Wednesday.

After listening to several lawyers on the bondholders’ request, Swain said she would issue a written decision on it.

Also at Wednesday’s hearing, Swain rejected taking steps to improve either the legal or financial status of COFINA bondholders.

Swain made an “Interpleader Order” in late May to the COFINA bond trustee, The Bank of New York Mellon, to hold the debt service coming to it and not pay the bonds, staring with the June 1 payment.

On Wednesday the Ad Hoc Coalition of COFINA Senior Bondholders asked the judge to allow the trustee to pay the COFINA senior bonds. The coalition also asked the order be modified to indicate that the trustee was holding the funds solely for the benefit of the COFINA bondholders.

Swain rejected taking any further actions for the time being, leaving her earlier order in place. She said circumstances hadn’t changed since her order and that she saw no “signs of manifest injustice.”

Also on Wednesday, the Ad Hoc Group of GO Bondholders said they should be allowed to have representatives on the Unsecured Creditors Committee for the Puerto Rico’s Title III case.

The attorney for the group, Andrew Rosenberg, said that the fact that the general obligation holders had a lien in Puerto Rico’s constitution didn’t prevent the group form getting representation in the group. He said the board disputes the lien. He also said there is precedent in U.S. legal history for different sorts of creditors to be on the same case committee.

The committee currently consists of representatives of companies and individuals who have supplied services and goods to the government and that the government has failed to pay.

Rosenberg, a partner with Paul, Weiss, Rifkind, Wharton and Garrison LLP, said Puerto Rico owed the GO holders more than 50 times as much as what was currently owed to those on the committee.

A lawyer representing the unsecured committee said the committee was opposed to the GO holders joining it. He said he was unaware of a case where a creditor who claimed first priority over all other creditors was on a committee with those other creditors.

Rosenberg said if the judge didn’t let the GO holders on the committee, she should give them their own committee.

Swain said she would release a written decision on this matter at some future point.

Finally, on Wednesday Swain rejected a motion by several municipalities to have a committee representing their interests in Puerto Rico’s Title III case. She said that section 1102 of the bankruptcy code allowed committees for creditors or equity security holders. The municipalities are not the latter and the municipalities’ principal concerns are not those of being creditors.

Swain said that Puerto Rico’s government and the Government Development Bank for Puerto Rico aren’t the same entity. Lastly, she said the municipalities are adequately represented without having their own committee.

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