PREPA bondholders defend lien on revenue

Bondholders and insurers of Puerto Rico Electric Power Authority revenue bonds are defending what they say is their lien on the authority’s revenues.

The parties filed a 73-page defense Monday in an adversary complaint in the PREPA bankruptcy on the lien issue. Their defense responds to an Oversight Board complaint submitted Oct. 3 that said the bondholders’ lien was only applicable to money in the bonds’ sinking and self-insurance funds.

The bondholders say they are owed $8.3 billion in principal and billions of dollars more in unpaid interest. They have not been paid anything for about six years.

“To facility the massive scale of [PREPA’s] borrowings, PREPA and the Commonwealth [of Puerto Rico] had to assure bondholders that they would be repaid from the revenues generated by that system over the decades required to repay the debt,” the bondholders wrote.

Given the current bankruptcy, the board says the bondholders have legal claim only to a few million dollars in the sinking fund. Even if the judge rules in favor of the board in this adversary proceeding, it is unlikely the board will seek to give the bondholders a few million dollars.

The bondholders’ arguments are “very strong,” said Puerto Rico Attorney John Mudd. Mudd said the problem facing the adversary proceeding is that there may not be a deal before Jan. 31, which is the final deadline for the mediation process to be completed. Both the board and the bondholders hope a ruling in this case would strengthen their bargaining position for a deal.

In their filing, the bondholders ask bankruptcy Judge Laura Taylor Swain to make several “declaratory judgements,” or interpretations of the law. Among other things, they ask her to say the bond trustee, U.S. Bank National, has recourse to the bond’s covenants to fund the sinking fund and, in event of default that has occurred, has recourse to all the authority’s revenues and moneys.

They ask Swain to declare that they have a perfected security interest, also known as a lien, on PREPA’s current and future revenue. They ask the judge to say the authority is breaching its obligations to revise rates to pay the bonds.

The board is seeking to limit liens to the amount in the sinking fund, even though Section 928 of the bankruptcy code (incorporated into the Puerto Rico Oversight, Management, and Economic Stability Act) provides that liens attach to moneys deposited in the fund “in the future.”

“PREPA lacks authority to avoid the trustee’s and bondholders’ liens under section 544(a) of the bankruptcy code or to avoid or subordinate those interests under 19 L.P.R.A. section 2267,” the bondholders said.

Section 805 of the bond’s trust agreement says the trustee can resort to drawing on the authority’s revenue stream if the sinking fund is inadequate, they said.

While the board says the bondholders can only turn to the sinking fund and self-insurance fund for money, the bond trust agreement, the Authority Act, United States and Puerto Rico constitutions contradict this, as do municipal finance principals, they said.

The bondholders in their defense, along with providing a point-by-point response to the board’s filing, also provided 15 affirmative defenses based on United States federal and Puerto Rican law.

For example, Puerto Rico’s actos propios principal prohibits the current situation where PREPA made promises that led the bondholders to act a certain way, but then did not follow its promises.