PREPA bond parties further defend their revenue lien in new court filings

Puerto Rico Electric Power Authority bondholder parties defended their liens on the authority's revenues in recent court filings, arguing the original trust agreement lays out their claims and a statement from PREPA's own chief financial officer confirms them.

Assured Guaranty, PREPA Ad Hoc Group, bond trustee U.S. Bank NA, and Syncora Guarantee and GoldenTree Asset Management on Thursday filed separate replies in an appeal being heard by the U.S. Court of Appeals for the First Circuit. U.S. Bank filed a comparatively short reply and said it supported the arguments of the other three filers.

The oral hearing on the appeal is scheduled for Jan. 29 in Boston.

If the bond parties win their arguments about their lien, the board's proposed plan of adjustment will have to be replaced.

In December, the bond parties filed their initial arguments in the court to which the Puerto Rico Oversight Board, Puerto Rico Fiscal Agency and Financial Advisory Authority, and Unsecured Creditors Committee responded earlier this month arguing the not only that the bondholders were wrong in claiming a lien on all revenues coming to PREPA but also that District Judge Laura Taylor Swain was wrong in awarding them an "unsecured claim" to the "net revenues" she calculated were available over the next 100 years. Thursday's filings were the bond parties' responses, primarily addressing the board's filing.

In its filing, Assured Guaranty said PREPA had many times acknowledged the bondholders' liens on revenue, including when PREPA's own chief financial officer signed a statement pledging its revenues in 2013.

The bond insurer said PREPA bondholders had two liens: one on current and future revenues and another on money in certain funds. Support for the first comes not only from the trust agreement's introductory statement but also from several of its sections. For example, section 712 bars PREPA from permitting "any charge or lien on the revenues ranking equally with or prior to the charge or lien on the revenues of the bonds issued under and secured by this agreement."

While the board had argued a wider reading of the agreement beyond the trust agreement's introductory statement indicates the bondholders only have a lien on $19 million held by PREPA funds at bankruptcy, Assured countered that a wider reading supports the bondholders having lien on all revenue.

Assured said there were several trust agreement statements indicating the bond parties have two liens, rather than the one the board argues.

Assured said the trust agreement defines "net revenues" as revenues above "current expenses" and not just what the authority deposits in particular accounts, which the board argued was the case.

The board has tried to make its case the trust agreement only provides a lien on money in certain PREPA funds but it failed to recognize the language is about how the bonds are amortized not on how they are secured, Assured said.

Assured also argued that contrary to the ruling of U.S. District Judge Laura Taylor Swain, bond parties had a "claim" on all the principal and interest currently due. Swain had argued they only had a "claim" on $2.4 billion, which is about 29% of what was due when the authority was put in bankruptcy in summer 2017.

Assured said Swain was also wrong in dismissing its actions against PREPA for breaching its trust obligation to the bondholders.

The other bond parties made similar arguments.

Syncora Guarantee and GoldenTree noted that in an earlier case, the District Court for Puerto Rico found the PREPA bonds were "secured by a pledge of PREPA's present and future revenues."

From July 2016 to the present, the authority has "diverted" about $5 billion of net revenues obligated to the sinking fund and then to the bondholders and this should be factored into the bondholders' claim, Syncora and GoldenTree said.

 In its filing, the PREPA Ad Hoc Group said several parts of Puerto Rico law say interpretation of the trust agreement must be consistent with what prevails for similar documents.

The group said the board, Puerto Rico Fiscal Agency and Financial Advisor Authority, and Unsecured Creditors Committee "confuse the [trust] agreement's lien-granting provisions (i.e. those granting security interests in both the revenues and revenue proceeds credited to certain funds) with the agreement's provisions governing the treatment of the bondholders' collateral (i.e. how the revenues and revenue proceeds, which constitute the bondholders' collateral, are be handled and used)."

U.S. Bank NA said, "The limited right of PREPA under the trust agreement to use some of the pledged 'revenues' it receives for the purpose of paying 'current expenses' does not reduce the scope of the revenue pledge; it merely provides a contractual means for the continued operation of the project that generates the pledged revenues in the first place."

The bond parties have "good arguments," said Puerto Rico Attorney John Mudd.