PREPA bondholders argue for $3.7 billion fee

Puerto Rico Electric Power Authority bondholders told the bankruptcy court they are entitled to a minimum $3.7 billion fee on top of the principal and pre-bankruptcy petition interest they believe they are due.

The group of bondholders and bond insurers working against the Puerto Rico Oversight Board's proposed debt restructuring proposal said existing bankruptcy law requires PREPA pay them the fee on the plan of adjustment's effective date.

The bond parties said PREPA reported $3.7 billion of net revenues from the time the board put it in bankruptcy in summer 2017 to the end of fiscal 2023. The United States Court of Appeals for the First Circuit has ruled that these net revenues were bondholder collateral and they have received none of it since the bankruptcy's start. They are entitled to an "administrative expense claim" for this loss of collateral, they said in a filing with the U.S. District Court for Puerto Rico earlier this week.

"This is a strong motion but ultimately the issue will depend on the evidence presented and what [District Judge Laura Taylor] Swain thinks should be done," said John Mudd, an attorney in Puerto Rico. "Also, PREPA does not have $3.7 billion in cash to pay bondholders."

The bond parties argue PREPA has continued to misappropriate their collateral since the end of fiscal 2023 and they could ask for more than $3.7 billion when more recent financial records become available.

United States bankruptcy code 503(b)(1), incorporated into the Puerto Rico Oversight, Management and Economic Stability Act, says PREPA's use of the bondholders' collateral entitles them to an administrative expense claim, the bond parties said.

U.S. bankruptcy code 922(c)'s guaranty of the bondholders' "adequate protection" also entitles them to an administrative expense claim, they argued, since the board and PREPA haven't ensured this protection despite the bond parties' efforts to protect it.

The Oversight Board has argued that PREPA's capital expenditures and subsidies like contributions or payments in lieu of taxes (CILT) should be seen as "Current Expenses" and thus not net revenues that the bond parties have a lien on. However, the bond parties said for almost 20 years PREPA has stated in monthly reports that capital expenditures and CILT are not "Current Expenses." Therefore, bond parties said this money fell under their lien.

The board has argued that the bond trust agreement limits bondholders' recourse to net revenues and this prevents the bond parties from seeking an administrative expense claim. The bond parties responded that nearly all special revenue bonds are limited recourse and that relevant U.S. bankruptcy code sections do not contain carveouts for limited-recourse lenders.

While the board has argued bond parties waived their rights to an administrative expense claim in the trust agreement, the bond parties said these claims are governed by the bankruptcy code and not the agreement. The bond parties could not have waived their rights to these sorts of claims because "there were no such rights at that time to know or waive" since PREPA had no right to bankruptcy when the agreement was entered into.

The bondholders believe their right to an administrative expense fee is in addition to their right to the due $8 billion to $9 billion in unpaid principal and pre-bankruptcy petition interest.

The bond parties filing their motion for an administrative expense claim were Assured Guaranty, Golden Tree Asset Management, National Public Finance Guarantee Corp., the PREPA Ad Hoc Group of investment funds, Syncora Guarantee, and bond trustee U.S. Bank N.A.

The Oversight Board said it would respond in a court filing and as of Thursday early afternoon hadn't yet filed the response.