Appeals court gives bondholders victory on PREPA liens

The U.S. First Circuit Court of Appeals almost entirely overturned a lower court's reasoning that underlay an Oversight Board proposed Puerto Rico Electric Power Authority plan of adjustment, in what appears to be a major bondholder victory.

On Wednesday afternoon, a panel of appeals court judges ruled unanimously that PREPA bondholders had a perfected lien on the authority's net revenues as well money in the authority's sinking and subordinate funds. They defined net revenues as any revenues "remaining after deducting reasonable and necessary operating expenses."

The judges said bondholders "have a non-recourse claim on PREPA's estate for the principal amount of the bonds, plus matured interest."

While U.S. District Judge Laura Taylor Swain had said the bondholders had an unsecured "claim" on $2.4 billion, the appeals court judges said their claim was on the bonds' principal and matured interest, a total of $8.5 billion.

In March 2023, Swain had ruled the bondholders had a lien only on money deposited in the sinking and subordinate funds at the time of bankruptcy, in the summer of 2017. Since the sinking fund only had $16 million and the subordinate funds had similar, though indeterminant amounts, it provided them little comfort.

The bondholders continue to have a lien on the net revenues acquired after bankruptcy petition, the First Circuit held, but the judges said the bondholders do not have a recourse beyond their lien on net revenues and the dollars in the sinking and subordinate funds..

The Oversight Board in a statement after the decision said it is reviewing the ruling on the "extent of the bondholders' collateral and recourse claim" against PREPA and it is also analyzing the impact, "if any, of the ruling on PREPA's proposed plan of adjustment."

The judges said they would not instruct Swain on how "she should deal with the bondholders' net revenue lien during plan confirmation."

"Under bankruptcy law, the court must determine the value of the bondholders' collateral on the confirmation date, which is prior to any rate increase," the Oversight Board said. "Therefore, the implications of the First Circuit decision and the value of the bondholders' collateral will depend on careful consideration and additional determinations by the U.S. District Court."

The Oversight Board-proposed plan of adjustment would have awarded as little as 4.3% of par value to PREPA bondholders.

It remains to be seen how Swain and the other parties to the bankruptcy, which has now gone on for nearly seven years, will deal with the judges' decision.