PREPA judge warns of 'war of attrition' without mediation

Stressing the hardship a dismissal would bring, all sides in the Puerto Rico Electric Power Authority bankruptcy were urged by U.S. District Judge Laura Taylor Swain to enter into mediation in an attempt to reach a consensual plan.

Bondholders are widely opposed to the Oversight Board's current proposed plan of adjustment, she noted, and if "confirmed as a non-consensual, widely contested plan, then litigation is certain to continue. Similarly, if the plan is not confirmed, the complexities of litigation will only multiply whether the Title III [bankruptcy] case is dismissed or not."

The current "stalemate" and the scenarios she mentioned are not "in the best interest of PREPA, its stakeholders, or, most important, the people who PREPA serves," Swain said. 

Without an agreement among the parties, Swain said, "the risk of dismissal is frankly higher than the likelihood I will be willing to afford the board years and hundreds of millions of additional dollars to experiment with development of another take-it-or-leave-it plan strategy."

The PREPA plan of adjustment hearing is scheduled for late July.

A dismissal would cause a "war of attrition" in the Puerto Rico courts, she warned.

Martin Bienenstock, the board's chief bankruptcy attorney, said he understood "the gravity" of Swain's words and would prefer to avoid dismissal.

Swain first ordered mediation to start in September. No mediation sessions have occurred since December, lead mediator Shelley Chapman told the court. According to a court filing earlier this month, an effort in April to get parties together failed because some parties set "preconditions" unacceptable to others.

The major disagreement appears to be about how much PREPA could afford to pay over the next 30 years.

Bond insurer Syncora Gurantee Attorney Susheel Kirpalani said Bienenstock wanted to discuss the size of the bondholders' claim, in the context of Swain's ruling that it was "unsecured." However, he said the bondholder parties want to talk about what PREPA can afford to pay and that would mean dealing with the board's assumptions about inflation, median customer income, consumption, and elasticity of demand versus price.

Amy Caton, attorney for the Ad Hoc Group of PREPA Bondholders, said she found it a "little troubling" that the board's position was "set in stone" despite "tremendous assumptions" in its offer.

Bienenstock said the board was willing "without preconditions of any sort" to mediate the creditors' "claim amount," and negotiate a "global resolution with the bondholders."

However, he said, the board could not increase its offer unless it believed it was "sustainable" and fair to Puerto Rico and its people.

The board said the risk of being too optimistic about PREPA's ability to pay could result in a future default without the possibility of resorting to Title III to adjust its debts.

Board Member Arthur Gonzalez told Swain a majority of the board members feels it cannot improve parts of its offer.

Bienenstock cited a precedent saying a judge could not order a mediating party to improve its offer.

He said board negotiator David Brownstein had 25 conferences with PREPA creditors in the last few months, though not all are mediation parties.

Caton said litigation has led both sides to realize fallacies in their positions and has pushed the sides to engage in mediation.

Swain ordered the parties to meet promptly and frequently in mediation in the near term, with mediation representatives given the power to make decisions.

Bienenstock, Caton, Kirpalani, and lawyers representing Assured Guaranty, the Official Committee of Unsecured Creditors, and the main PREPA union agreed they would abide by the order.

Swain said Chapman should file a report on Tuesday identifying a schedule and plan for the mediation session and follow up with monthly reports on the number of mediation sessions completed and scheduled.