PREPA parties far apart on value of bondholders’ claims

A major sticking point in the Puerto Rico Electric Power Authority bankruptcy is the discrepancy over the size of bondholders’ claim, with the Oversight Board and bond parties $6.5 billion apart.

The board, in a filing Tuesday, placed the value at 24% of principal and pre-petition interest due at time of the bankruptcy petition in summer 2017, while the bond parties, in a separate filing, valued it at 100%.

The board said bondholders had a claim to $2 billion in net revenues for what it said was $8.4 billion in pre-bankruptcy principal and interest. The bondholder groups said they had a claim to all of what they said was $8.5 billion in principal and interest. 

“The estimates are really a ‘best case scenario’ for both sides and Judge [Laura Taylor] Swain will probably not accept” either, said Puerto Rico Attorney John Mudd. “Having said that, it will be closer to the board’s estimate, if we get there. The judge still hopes to have a mostly consensual plan of adjustment, which seems doubtful at this time.”

In a ruling in March, Swain said the parties should work to determine the size of the bondholders’ net unsecured revenue claim.

In its filing, the board offered the hypothetical situation where the bondholders managed to appoint a receiver in January 2018, six months after the bankruptcy filing. It said the receiver would have had to operate under a number of conditions.

The board said in that scenario there’s a 20-year limit on enforcement of rights and so January 2038 has to be the final date for estimating incoming revenues available for the bonds.

The board, led by Attorney Martin Bienenstock, also said the PREPA Trust Agreement caps rates to no higher than a “reasonable” rate, which he explained as “affordable.”

The board had its expert calculate the maximum residential and commercial and industrial users could afford to pay PREPA for electricity and how much extra revenue that would generate.

Before paying bondholders, the board said, $820 million in unpaid operating expenses and takings claims at the time of the petition for bankruptcy in summer 2017 would have to be paid.

Streams of future cash flow must be discounted to the present value, the board said, while other factors and risks reduce the claim by 4%.

The bond parties said the bond trust agreement promises bondholders payment of principal and interest and that gives them a claim on all pre-petition principal and interest. Claim “estimation in this context is unwarranted,” they said.

There are “no statute of limitations constraint here,” said the bond parties, which include the Ad Hoc Group of PREPA Bondholders, Assured Guaranty, Syncora Guarantee, and bond trustee U.S. Bank N.A. Further, they claim, there is no time limit on when they could appoint a receiver.

The bondholders’ right to recover is not subject to discounting “based on collection uncertainty or delay,” the bond parties said.

Depending on what assumptions one makes, the bond parties’ expert said, all PREPA’s debt could be paid off in either 25 or 36 years.

According to the bond parties, the bond trust agreement uses the term “reasonable rate” to denote a level sufficient to pay current expenses and the bondholders.

“There can be no serious question that PREPA could, over time, generate enough surplus revenues to pay the bonds in full,” the bond parties said.

The Puerto Rico Fiscal Agency and Financial Advisory Authority supports the board’s position. It said if the bondholders had appointed receiver in 2018, he or she would have been subject to the PREPA and Commonwealth of Puerto Rico fiscal plans. These would have prevented the substantial rate increases discussed by the bondholders. 

The Unsecured Creditors Committee said it supported the board’s filing but the board made “assumptions” and “contingencies” that “artificially increase the unsecured net revenue claim.” The committee said the board’s 6.5% present value discount rate is too low.

In considering what is available for paying bondholders, “all obligations” connected with operations and not just “current expenses” should be considered, the committee said.