Bonds

Puerto Rico board, bondholders argue PREPA claim basis

The latest battle between the Puerto Rico Oversight Board and Puerto Rico Electric Power Authority bondholders came in filings this week in which the bondholders said the board’s stated “obstacles” to collections have nothing to do with what they are owed.

The board, in turn, said the bondholders’ arguments are “erroneous.”

In filings late Monday, the bondholders said the law lets them claim all the $8.47 billion in principal and interest due when the bankruptcy was filed and the board said the law, as interpreted by U.S. District Court Judge Laura Taylor Swain, means the bondholders are only entitled to a $2 billion claim.

Swain asked the parties to use assumptions to estimate the value of an “unsecured net revenue claim,” to which she said the bondholders were entitled. 

The bond groups said while the board offers “various obstacles to collection, ranging from hurricanes to Puerto Rico Energy Bureau approvals,” those issues have no impact on the dollar amount of their claim.

The board is misinterpreting the U.S. bankruptcy code section on claims estimation, the bond groups said, which is why the board “cannot cite a single authority holding that the amount of a right to be paid through an equitable remedy is capped by collection risk or delay.”

New York law puts limits on “legal” remedies but not “equitable” remedies, like the right for the bond parties to appoint a receiver to impose new rates.

Further, the bondholders claim, the board uses “irrelevant cases” in determining net present value.

The bond parties that filed together were the Ad Hoc Group of PREPA Bondholders, Assured Guaranty, Syncora Guarantee and bond trustee U.S. Bank N.A.

The board’s attorneys claim the bond parties’ “opening brief is premised on a complete misapplication of this court’s lien challenge opinion, which, in turn, renders erroneous each of their legal arguments.”
 
Swain rejected the bondholders’ assertion that they should get “principal and interest due on the petition date,” the board said.

Their argument, the board said, is based on the “erroneous assumption that the court’s ruling is premised on a recourse claim for principal and interest,” the board said.

The bondholders “manipulate the model to always hit its preordained conclusion of payment in full,” the board charged.

The board said a report by bond-party expert Maureen Chakraborty “contains material flaws,” leaving out “critical expenses while assuming the plan works without them.”

Asked how Judge Laura Taylor Swain was likely to respond to the filings, an attorney not involved in the case who wished to remain anonymous, said, Swain “determines what she wants to do and then looks for the legal justification.” 

“She will not get a consensual plan of adjustment and she is slowly realizing it,” the attorney continued. “Then the real question will be whether she will cave into the board’s demands … or will she dismiss the Title III [bankruptcy]? I think that the mediation team’s reports will be crucial.” 

An attempt to reach Swain for a response was not immediately successful.

Puerto Rico Clearinghouse Principal Cate Long said, the bankruptcy code claim estimation process is not “an exercise to determine the ability of the debtor to pay bonds via future revenues. Judge Swain appears determined to heavily discount the bondholders claim and will likely adopt any argument put forward by the Oversight Board to do that.”

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