The PREPA Bondholders group threatened to abandon negotiating a debt restructuring if the current mediation fails, warning if it does they may seek full repayment through other approaches.
The bondholders made the statements in a filing late last week in the U.S. District Court for Puerto Rico, two hours after
The PREPA Bondholders said they have reached three agreements for PREPA’s restructuring over the years.
“After five years without any progress having been made towards a confirmable plan of adjustment, and numerous instances of the government parties committing an about-face and abandoning longstanding settlement agreements, the PREPA Bondholders intend to move to dismiss this [Title III bankruptcy] case and/or seek appointment of a receiver absent a consensual resolution. At some point, enough is enough.”
There is a total of about $8 billion of PREPA bonds outstanding and roughly $1 billion more of non-bond debt. The PREPA Bondholders control substantially more than half of the PREPA bond par outstanding.
PREPA has been in a bankruptcy process guided by Title III of the Puerto Rico, Oversight, Management, and Economic Stability Ac,t since mid-2017. Talks about restructuring the bonds go back to mid-2015.
“If no consensual agreement can be reached in mediation, the PREPA Bondholders are fully prepared to litigate all of the various issues, and demonstrate the absurdity and bad faith of the evolving positions adopted by the various parties in this case, as well as PREPA’s ability to pay its bondholders in full pursuant to its contractual obligations,” the PREPA Bondholders said. “Before we embark upon years of costly litigation, the parties should take the opportunity in mediation to try to reach one more settlement agreement.”
“It is obvious from the motions of the Board, Unsecured Creditors Committee and PREPA bondholders that they are not near a resolution that could lead to a plan of adjustment,” said Puerto Rico Attorney John Mudd. “While the board intimates and the UCC flat out says that they will litigate the lien issue, Bondholders say that even if they lose the lien issue, they would be paid in full. I agree. If there is no lien but the Title III is dismissed, under Puerto Rico law, you still have a debt that must be paid.
Mudd said that even if the Title III is not dismissed, bondholders may seek the lifting of the stay to get a receiver appointed by another judge as per the First Circuit's decision years ago.
“The 1974 agreement says that if 25% of bondholders request the receiver, he must be appointed," Mudd noted. "The biggest power of the receiver is to raise the rates to pay bondholders, which in 2015 was given to Puerto Rico Energy Bureau. Bondholders will argue, however, that the 2015 law is a taking without just compensation and outside of a Title III would probably give the bondholders a win.
“Hence, no settlement would mean years of litigation with a very detrimental effect on the island's economy,” Mudd said.
Cate Long, Principal at Puerto Rico Clearinghouse, said it appears the Oversight Board and UCC position is based on an assumption that Judge Swain is "deeply anti-creditor" and will simply rule that bondholders have no lien on revenues beyond the sinking fund.
"This is a disservice to the court because it assumes that she will find a way to interpret the 1974 trust indenture, enabling legislation and other bond documents to cram creditors regardless of what the actual meaning[s] of the documents [are],” Long said.
The day before the PREPA Bondholders filed their informative motion, the Unsecured Creditors Committee filed a limited objection in the Title III bankruptcy asking Swain to commence litigation on “threshold issues” as the mediation continued. These issues would be whether the bondholders “security interest” extended beyond the roughly $8 million that had been deposited with the bond trustee and whether the bondholders have a claim against PREPA for any difference between the face bond amount and the funds on deposit to pay them.
The UCC argued that the PREPA bankruptcy has moved slowly and it would be best to move forward using two approaches: mediation and litigation, noting the latter could move quickly.
The Oversight Board responded to the UCC’s limited objection by filing a reply in which it said there may come a time to restart litigation in the Title III case but now was not that time.
The PREPA Bondholders said both the UCC and board make the “mistaken assertion that litigation regarding the PREPA bonds [would] be simple and straightforward.” The bondholders said there is extensive briefing that would need to be done to resolve the issues.
The PREPA Bondholders said it believes it could show the bondholders have valid and perfected liens on PREPA revenues. It said the bond documents are far more powerful than those of Puerto Rico Highways and Transportation Authority.
The bondholders said there are major factual issues that also would need to be developed in litigation, requiring extensive discovery and this require lots of time.
“Even if the UCC or the board were to succeed in their lien challenges — which they would not — PREPA would still be required to pay bondholders in full absent a settlement,” the PREPA Bondholders group said.
The PREPA Bondholders consist of the Ad Hoc Group of PREPA Bondholders, Assured Guaranty Corp. and Assured Guaranty Municipal Corp., National Public Finance Guaranty Corp., and Syncora Guarantee. The Ad Hoc Group of PREPA Bondholders consist of several major investment and hedge funds. Eight law firms are representing the PREPA bondholders.
Puerto Rico Gov. Pedro Pierluisi
