Board threatens 0.21% payment for PREPA bondholders who don’t settle


The Puerto Rico Oversight Board threatened to pay as little as 0.21% of par to Puerto Rico Electric Power Authority bondholders who don’t accept its settlement offer.

The main PREPA bondholder group challenged to the assumptions behind the Oversight Board’s offer.

The less-than-1% payout scenario is based on the board winning in the adversary proceeding on bondholders’ lien scope and recourse rights.

Syncora Guarantee Attorney Susheel Kirpalani said PREPA bonds have more default protections for bondholders than did the pre-default Puerto Rico Highways and Transportation bonds.

The board offered, in an EMMA posting Wednesday, a recovery of approximately 50% on the PREPA bonds to uninsured bondholders.

“Rather than risking nearly no recovery on your Bond Claims, this settlement offer allows you to settle for payment in the form of new bonds of approximately half your claims with the possibility of receiving more depending on how many bondholders settle and the outcome of the litigation over the two contentions described above,” the EMMA notice said.

In a Puerto Rico bankruptcy omnibus hearing on Wednesday, Oversight Board attorney Martin Bienenstock said the board might be nearing deals with some creditors in the bankruptcy.

In response, Ad Hoc Group of PREPA Bondholders attorney Amy Caton said her clients, who hold more than $4 billion of the bonds, were not near a deal. The latest submission, she said, offers worse terms than those the board offered in December negotiations. The group plans to file an objection to the board’s proposed disclosure statement on Friday.

The bond Trust Agreement effectively gives the bond trustee and bondholders claims to only money in three PREPA accounts at the time of the bankruptcy petition, all of them small in value, Bienenstock said.

Bankruptcy creditors can’t make claims on future income, Bienenstock and Unsecured Creditors Committee attorney Pedro Jimenez said.

PREPA bankruptcy Judge Laura Taylor Swain asked if there was value to the contractual obligation of PREPA to take an action, which could be seen in the bankruptcy as an “unsecured claim.”

Bienenstock replied, in part, that section 804 of the Trust Agreement says the remedy for a breach in covenants is collection from only certain funds. He acknowledged the agreement says other PREPA money could be collected, but the context suggests these would be limited to money from the funds.

Ad Hoc Group of PREPA Bondholders Attorney Thomas Mayer said bondholders agreed to be paid from the sinking fund, which PREPA agreed to put money into. Since entering the bankruptcy, PREPA stopped putting money into the fund, and bondholders have a right to seek that money, Mayer said.

While one U.S. case might indicate a creditor cannot get a claim on future revenues, this case is irrelevant, Mayer said, because what matters is Puerto Rico law, and the act that addresses PREPA authorizes a pledge on future revenues.

Mayer told Swain if she were to rule that the U.S. bankruptcy code only allows her to look at accumulated revenues and not future revenues, “that ruling would invalidate every revenue bond in this country under every Chapter 9 that will ever be filed. That’s not what Congress wanted.”

Authority revenues are pledged to the bond trustee in several places in the bond trust agreement, Mayer said. Additionally, there is one passage that pledges the holding of a few small funds and “any other moneys available” to the bondholders.

The board is trying to make the one lien addressed to the bondholders control the other liens for the bond trustee, he argued. But this makes no sense, Mayer said. Furthermore, he said, the “any other moneys available” in the bondholder pledge is a broad pledge.

Syncora Guarantee Attorney Susheel Kirpalanisaid the PREPA bonds were different from the Puerto Rico Highways and Transportation bonds, which Swain ruled gave bondholders limited remedies to address the default.

The bondholders were not arguing they had a “non-dischargeable equitable right” to be paid in full, Mayer said, rather, that in the bankruptcy they have a “claim” to the money.

Assured Guaranty Attorney Mark Ellenberg pointed to part of the trust agreement that said bonds issued based on the 1947 indenture should be paid from a particular PREPA fund but once those bonds were paid out, bonds should just be paid from “revenue.” Now that all 1947 indenture bonds have been retired, the existing bonds have the wider claim.

Swain said she would rule “as promptly as I can.”

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