PREPA perfection deal settles claim for time being

Parties to the Puerto Rico Electric Power Authority bankruptcy reached a deal on bondholder claims to PREPA special funds money.

The parties were arguing whether bondholders had perfected liens on funds in PREPA's construction, capital improvement and reserve maintenance funds.

The sides reached a deal where PREPA would transfer $3 million to the sinking fund held by the bond trustee, U.S. Bank N.A., that would ultimately go to the bondholders and bond insurers. The sides filed a joint informative motion Wednesday for the court's approval.

In exchange, the bondholders, bond insurers and bond trustee would release their immediate claims to money in the construction, capital improvement, and reserve maintenance funds while retaining most of their rights to appeal the treatment of the funds' money.

In any appeal, the bond parties would have waived their right to say the specified funds were subject to a perfected security interest under Article 9 of the Uniform Civil Code. However, they reserved the right to argue they "have perfected liens on all or any part of PREPA's revenues … credited to the specified funds … and therefore the perfected liens … on all or part of PREPA's moneys … extend to moneys and property credited to the specified funds."

The Puerto Rico Oversight Board, U.S. Bank, the Ad Hoc Group of PREPA Bondholders, Assured Guaranty Corp., Assured Guaranty Municipal Corp., and Syncora Guarantee are the parties to the agreement.

Assuming U.S. District Court Judge Laura Taylor Swain approves, most or all the remaining issues in the so-called lien adversary proceeding in the bankruptcy would be resolved.

Assured Guaranty and perhaps other bond parties intend to appeal the plan of adjustment they expect Swain to approve. 

The deal "closes out the lien adversary and should open the way for bondholders to appeal Swain's erroneous lien decision that pledged revenues do not constitute a secured claim," said Puerto Rico Clearinghouse Principal Cate Long.

She called the agreement "a finely crafted ceasefire on a relatively unimportant part of the complex lien litigation. Judge Swain had already ruled that bondholders have no security interest in the new revenues that would flow into the specific accounts."

The board has promised to submit a proposed plan of adjustment to the court by the end of Friday. This will include the terms negotiated with newly settling bondholder groups, which reportedly include BlackRock Financial Management and perhaps Nuveen Asset Management and Franklin Advisers.