PREPA judge overrules bondholder objections to disclosure statement

The judge in the Puerto Rico Electric Power Authority bankruptcy case rejected the bond parties’ objections to the Oversight Board’s supplemental disclosure statement, a major step toward confirming the deal, which sets recovery for some bondholders at as little as 3.5% of par.

U.S. District Judge Laura Taylor Swain asked the board to make minor revisions to the statement by the end of the week so she can formally approve it and related documents on Monday.

Swain’s ruling, after a full-day hearing Tuesday, removes the last major hurdle under her control until the plan of adjustment hearing. The bondholders have filed a case with the U.S. Appeals Court with the First Circuit to lift a stay on seeking a receiver in the case and will almost certainly appeal the plan if Swain approves it. But Swain’s Tuesday ruling was a significant step forward for the board’s plan of adjustment.

An attorney following the case, but not involved in it, said, “Swain will approve the plan of adjustment.”

But, Cate Long, principal for Puerto Rico Clearinghouse, said, “It’s far from clear from her comments” that Swain will approve the plan since she “raised numerous issues about” its confirmability “and said that a decision would require additional discovery.”

“Notably this is the first Title III case where major creditor parties have opposed a plan and stated their intention to appeal confirmation,” Long continued. “The March confirmation hearing will be even more contentious than the disclosure statement hearing.”

In her ruling, Swain said the latest plan, with some minor modifications, has adequate information and the objections, while “significant,” didn’t make the plan patently unconfirmable. She added, most of the objections were “premature” and should be considered at a later stage.

For a plan to be “patently unconfirmable,” it must be barred by “law,” Swain said. Many of the objections are to “substantive and economic features or alleged consequences” of the plan. These included the classification and treatment of creditor claims, “the propriety of proposed fees and settlements … the necessity for the plan to account for a range of reasonable different scenarios, and the good faith or the alleged lack thereof of PREPA and the Oversight Board in negotiating, formulating and proposing the plan of adjustment,” she said.

While these are important issues that should be addressed, they are premature now, Swain said. The objectors haven’t shown that as “a matter of law” the proposed plan of adjustment could “never be confirmed regardless of what facts may ultimately be proven.”

Swain discussed several disputes in more detail. For example, she brought up complaints by GoldenTree Asset Management, the PREPA Ad Hoc Group, and the bond trustee about disparate intra-class treatment and the validity of a restructuring support agreement fee expected to be awarded to a settling group of bondholders including BlackRock Financial Management. The objecting bond parties say a part of the U.S. bankruptcy code prohibits this.

Swain said that before the factual record is developed, it could not be determined if the RSA fee would be a valid administrative expense and whether members of the uninsured bondholders’ class were being treated differently. Accordingly, she overruled these objections as “premature.”