Appeals court hears PREPA bondholder request to lift stay

Federal appeals court judges heard Puerto Rico Electric Power Authority bond parties’ request to lift a stay or hold a hearing on it, so they could appoint a receiver to run PREPA, hoping they’d receive more for their bonds than under the Oversight Board’s plan.

“The bottom line of all this is that municipal bonds are not quite as secured as the market may have thought,” said First Circuit Court of Appeals Judge William Kayatta near the end of the hearing. 

“Your honor, I think municipal bonds are going to change a lot after this case,” said board attorney Martin Bienenstock. “They’ve changed already.”

Judge O. Rogeriee Thompson asked if the bond parties’ arguments to lift the stay were affected by U.S. District Judge Laura Taylor Swain’s decision last week in the adversary proceeding on a variety of legal issues. GoldenTree Asset Management attorney Thomas Lauria, who also represented bond insurer Syncora Guarantee at the hearing, said it wasn’t.

The bondholders were the only PREPA creditors with the right to seek a receiver, he said. Swain hasn’t ruled on the bondholders’ priority among creditors and this issue would be part of any hearing to potentially lift the stay, Lauria said.

Federal bankruptcy law incorporated into the Puerto Rico Oversight, Management, and Economic Stability Act requires federal courts to hold a hearing on the request for a receiver, Lauria said. Swain rejected the request in a written statement.

Lauria said the way Swain defined the bondholders’ claim the amount due bondholders decreases each day, which is why the bond parties want the claim heard as soon as possible.

Responding to Judge Julie Rikelman’s question if his motion was “duplicative” of earlier motions for a lift stay, Lauria said this motion was different and based on Swain’s June 2023 decision setting the size of bondholders’ claim.

Speaking for the Oversight Board, Bienenstock said this was the first time he had heard Lauria’s claim for bondholder priority of payment.

Thompson said Lauria’s bringing up this topic was “very odd.” Bienenstock agreed, saying the notion that bondholders had priority for payment was contrary to bankruptcy law and the cases the bond parties presented to support their argument for a lift stay hearing don’t support it.

The lift stay hearing is primarily for secured claims and Swain has ruled nearly all the bondholders’ claims are unsecured, Bienenstock said.

Rikelman attempted to summarize Bienenstock’s response to the bond parties by saying most of what they want addressed in a lift stay motion hearing was addressed by Swain in the spring and the rest in an order filed last week.

Lauria replied, the bond parties’ remedy is against the property of the debtor. To decide on whether that was true, the court needed to hold a hearing on the lift stay motion.

Case law doesn’t say adequate protection is available only to secured creditors, Lauria said. The bondholders’ right to seek a receiver is unique, he said.