PREPA bondholders file motion to lift litigation stay

Puerto Rico Electric Power Authority bondholders opposed to the Oversight Board’s proposed restructuring filed a motion to lift the bankruptcy’s litigation stay, which could lead to their appointing a receiver for PREPA.

“The Fifth Amendment and [Puerto Rico Oversight, Management and Economic Stability Act] do not permit secured creditors to remain handcuffed, without a hearing, while their collateral disappears,” the bondholders told U.S. District Court Judge Laura Taylor Swain.

In the aftermath of the First Circuit Court of Appeal’s decision in favor of the bondholders’ lien on net revenues this past year, continuation of the stay order is impermissible, they said. The court is required to lift the bankruptcy’s current stay on litigation given the bondholders lack of “adequate protection” on their lien rights, according to the bondholders.

The bondholders suggested they could petition a local Puerto Rico court to allow them to appoint a receiver for the authority who would be a “better steward of PREPA for the people of Puerto Rico,” if the stay were to be lifted, they told Swain.

The bondholders said a legal balance of harms consideration favors relief from the stay. The stay’s original rationales are no longer valid, they argued. The bankruptcy has dragged on for more than 7 1/2 years, which they said is unreasonable.

The bondholders said the court should dismiss the current bankruptcy altogether because the board has failed to propose and confirm a plan of adjustment.

The board has created a new fiscal plan with an unreasonable position that PREPA has no net revenues, the bondholders said. The plan says PREPA will have four times more expenses than the board’s last PREPA fiscal plan projected, they claim. The recently approved plan “diverts tens of billions of dollars of future net revenues that comprise the bondholders’ collateral to pay expenses that clearly do not constitute current expenses.”

The board has made resolution “effectively impossible by unilaterally ginning up a new fiscal plan that eliminates all debt capacity,” the bondholders said.

They also said they want the stay lifted to allow them to litigate their accounting counterclaim in an adversary proceeding, something the First Circuit explicitly ruled they could do. This would allow them to challenge the plan’s estimate of PREPA expenses, for example.

The board, through a spokesman, said it was reviewing the bondholders’ motion and would respond to it in court.

The board made clear last week that it is not planning to significantly change its offer to the bondholders in an opinion piece ran in the El Vocero website. Board Executive Director Robert Mujica Jr. said the board is willing to compromise but “a group of bondholders led by hedge funds continue[s] to demand more than the people of Puerto Rico can reasonably pay.”

Some investors bought PREPA’s debt after the bankruptcy filing in July 2017 when it was distressed. “Now, as the people of Puerto Rico suffer from the effects of a rapidly deteriorating power infrastructure and as PREPA needs resources to repair the energy system to the level that the people deserve and pay for, several of those investors insist that the people of Puerto Rico bail them out,” Mujica said.

In other PREPA bankruptcy news, Swain ruled the bondholders will be able to challenge the board’s and local government’s professional fees until 14 days after the court lifts the litigation stay.