Lower court gave PREPA bondholders too much: Oversight Board

The U.S. District Court’s interpretation gave more to Puerto Rico Electric Power Authority bondholders than legally allowed, the Puerto Rico Oversight Board told the First Circuit Court of Appeals.

Not only are the bondholders wrong in claiming a lien on all revenues coming to PREPA but District Judge Laura Taylor Swain was wrong in awarding them an “unsecured claim” to the “net revenues” she calculated were available over the next 100 years, the board argued Monday in a filing.

While bondholders point to the bond trust agreement’s preamble, which pledges revenues to them, they ignore the words “to the extent provided in this agreement” in the same sentence, the board said. The extent is “specified in articles IV and V of the trust agreement as being certain net revenues and other moneys deposited in certain funds,” the board argued. 

Article IV says money in the authority’s construction fund is subject to bondholders’ lien, and Article V describes how some revenue is to be deposited in the sinking fund, which the board acknowledges the bondholders have a lien on, according to the board.

In its brief in response to the bondholders’ appeal of Swain’s lien decision, the board said section 601 of the trust agreement “‘disclaims any security interest by any creditor in moneys received by [PREPA] before they are transferred to the liened funds.”

The board said the United States Uniform Commercial Code barred the bondholders from having security interests (liens) on anything beside the authority’s sinking and subordinate funds.

The Oversight Board said Swain was correct in dismissing bondholders’ breach-of-trust counterclaim in the District Court’s adversary proceeding. The bondholders’ use of a trust agreement section to make their argument was “misplaced” because it says “depositories,” not “PREPA,” were to hold the money in trust.

Bond parties involved are the PREPA Ad Hoc Group, bond trustee U.S. Bank N.A., GoldenTree Asset Management, Syncora Guarantee, and Assured Guaranty.

While the Securities Industry and Financial Markets Association filed an amicus brief saying a ruling against the bondholders would harm the municipal market, the board said SIFMA has filed similar briefs over the years with the First Circuit and the Supreme Court “prophesying doom for the municipal market if a decision goes against them” and each time they have been rejected “no such market collapse has followed.”

The bond parties note parts of the bond trust agreement speak of “further security,” indicating liens in addition to the preamble lien, the board said. The “further security” being referred to, the board contends, is actually “assurances that [PREPA] will charge rates sufficient to pay the bonds, deposit revenues in to the sinking and subordinate funds and pay the bonds when they come due.”

Swain’s award to the bondholders of an “unsecured claim” to net revenues, with a present value of $2.388 billion, was wrong, the board told the First Circuit. They said Swain’s “decision to convert equitable remedies to recourse claims is unprecedented and contrary to centuries of bankruptcy practice.”

On the day it put PREPA into bankruptcy in 2017, the board said the bonds were “secured by a lien on all of PREPA’s revenues” but less than a month later it said the lien was only on “net revenues.” A few months later it said the lien was only on net revenues found in the sinking and subordinate funds.

Proskauer Rose Partner Martin Bienenstock leads the board’s bankruptcy team and was one of the brief’s authors.

GoldenTree declined a Bond Buyer request to respond to the board’s brief. A lawyer for Syncora didn’t immediately respond to a request for a comment.