Appeals court rejects Oversight Board's appeal on PREPA bondholder liens

The First Circuit Court of Appeals rejected appeals by the Puerto Rico Oversight Board and the Unsecured Creditors Committee of its decision favoring bondholders of the Puerto Rico Electric Power Authority.

The appeals court's rejection Tuesday of the board and the UCC's petition for rehearing was "expected," Puerto Rico Attorney John Mudd told The Bond Buyer. Though he anticipated the board would request the United States Supreme Court review the decision, the PREPA bankruptcy is in "danger," he said on the X platform.

"Judge Swain doubts that she will do anything to favor appointing a receiver or dismissing the bankruptcy but the alternative is to continue the PREPA litigation, with the usual appeals," Mudd said on X. "It will be two to three more years of uncertainty."

In light of the First Circuit's decision, "the Oversight Board will proceed on its path to a responsible debt restructuring that will end PREPA's bankruptcy and leave PREPA with the critical resources to make the necessary investments to provide Puerto Rico with reliable electricity," it said in a statement. "We will continue to work diligently to find the best possible outcome for Puerto Rico."

The "total defeat of the [Oversight Board] at the First Circuit should be a wakeup call for the board and its extremely well-paid advisors," former board-member Justin Peterson wrote Tuesday on X. "It's time to make a deal to end PREPA bankruptcy. If not, the board should be replaced by @realDonaldTrump next month. MAGA!"

"Tone deaf to the court's repeated rejection of its arguments, the board announced its intention to resume its already-failed strategy to impose a nonconsensual plan of adjustment, rather than working with its secured and properly perfected bondholders on a consensual exit from bankruptcy that recognizes the bondholders' legal rights and funds PREPA's immediate financing needs," a group of PREPA bondholders and insurers opposed to the board's proposed plan of adjustment said. "The board's strategy ensures that PREPA will remain in bankruptcy for the foreseeable future and that measures to improve the reliability of PREPA's electric system will be delayed indefinitely against the best interests of Puerto Rico."

A panel of three judges on the First Circuit decided largely in favor of PREPA bondholders on key legal issues in June. The judges said the bondholders have a perfected lien on the authority's net revenues as well as on money in the sinking and subordinate funds. The judges said they had a non-recourse claim on PREPA's estate for the bonds' principal and unpaid interest, which totals around $8.5 billion.

After the June decision, the board, UCC and Puerto Rico's Fiscal Agency and Financial Advisory Authority asked the court judges to reconsider and the judges solicited comments from PREPA's bankruptcy.

The First Circuit judges largely sided with the bondholders in November, though they revised their arguments on some topics. The board and UCC asked them later that month to reconsider. The panel rejected reconsidering their decision Tuesday.

In other PREPA news, power had been restored to about 99% of its customers by Thursday morning, after a blackout affected the entire island Tuesday, according to LUMA Energy, which handles the authority's transmission and distribution.

Jenniffer González Colón was sworn into office as the new governor of Puerto Rico Thursday. She has said she wants to possibly end the contract with LUMA and find a different company to handle transmission and distribution. The opposition Popular Democratic Party said Wednesday it would be filing legislation to end the contract.