Appeals court gives PREPA bondholders a win

The U.S. Court of Appeals for the First Circuit largely sided with Puerto Rico Electric Power Authority bondholders in a ruling Wednesday, affirming their lien on the authority's net revenues.

The bondholders have a claim for all the principal and interest due, which the judges said was just under $8.5 billion. By contrast, U.S. District Judge Laura Taylor Swain had ruled in spring 2023 they had a claim on only $2.4 billion.

The court rejected requests for a rehearing en banc, in which all judges of the First Circuit court would participate.

The ruling by the three-judge panel "could lead to the lifting of the stay for the appointment of a receiver for PREPA, who will seek a rate increase to pay bondholders," said Puerto Rico Attorney John Mudd. "More likely, however, Judge Swain will seek the views of the parties, insist on further mediation and see what happens. The [Puerto Rico Oversight] Board will likely seek certiorari to the U.S. Supreme Court."

The board told The Bond Buyer Thursday morning it was reviewing the decision, order, and judgment.

"The First Circuit's reaffirmation that the PREPA lien is valid means the bonds are secured and therefore have seniority among creditors," said Puerto Rico Clearinghouse Principal Cate Long. "The current proposed plan of adjustment and fiscal plan treat the bonds as unsecured and therefore must be revised."

If the board doesn't make those changes, she said, the bankruptcy "court needs to allow bondholders to appoint a receiver and make those changes and get PREPA operating as an efficient utility."

In an opinion written by First Circuit Judge William Kayatta Jr., the three-judge panel said the bondholders had a non-recourse claim on PREPA's estate for the bonds' principal and interest and have a lien on net revenues and the money that was in the sinking fund when the bankruptcy was filed.

The First Circuit panel declined to tell the District Court how the ruling should be applied.

Kayatta said the board's argument that because future net revenues do not yet exist, PREPA could avoid a lien on them, was wrong.

The bondholders asked that the bonds be payable from investment earnings, federal subsidies, or insurance proceeds. The First Circuit rejected this, ruling they have a lien on net revenues — whatever is left after operating expenses are paid.

The court affirmed the bondholders have a claim for accounting.

In spring 2023, Swain ruled bondholders had a lien only on the money deposited in the sinking and subordinate funds at the time of bankruptcy in July 2017. The sinking fund had only $16 million and the subordinate funds had similar, though indeterminant, amounts.

The board, Puerto Rico Fiscal Agency and Financial Advisory Authority and the Official Committee of Unsecured Creditors had asked for a rehearing, but the judges chose to decide the issues without further oral hearings.

In a separate order, First Circuit Judges Julie Rikelman and Lara Montecalvo said there is no quorum of active circuit judges who are not recused who could vote on requests for rehearing en banc and therefore denied the request. Given Wednesday's panel opinion, "a majority of the active judges who are not recused find the petition for rehearing en banc to be moot in part and otherwise do not favor granting the petition."

Neither the unsecured creditors nor FAFAA immediately responded to a request for a comment.

As of noon, Eastern time on Thursday, Swain had not posted anything to the docket responding to the First Circuit decision.