Potential court ruling on PREPA liens sparks broad revenue bond concerns
3 min read
Appeals court judges this week heard arguments over the scope of liens on Puerto Rico Electric Power Authority revenues in a case widely seen as potentially having major implications for how municipal revenue bonds are treated in debt adjustment proceedings, such as Chapter 9, in the future.
The United States Appeals Court for the First Circuit is considering how to treat PREPA’s current and future revenues in the authority’s debt restructuring. Bondholders and bond insurers argue they have a claim to PREPA’s current and future revenues, which they argue should extend indefinitely including beyond the debt restructuring, while the Oversight Board says they only have a claim on money that sits in PREPA’s reserve fund.
More widely, observers say the PREPA trust agreement is similar to those for municipal revenue bonds across the country and if the court rules for the board, bondholders’ legal claim after a bankruptcy could be a fraction of a percent of the principal, as the current proposed plan of adjustment offers to a wide swath of PREPA bondholders.
PREPA bond parties argue their trust agreement clearly gives them a lien on incoming revenues and supports their claim for the $8.2 billion pre-bankruptcy principal
At Monday’s First Circuit hearing, Kayatta repeatedly asked questions about the ramifications of the bond parties’ argument that their lien on revenues could extend indefinitely, including beyond a debt restructuring execution.
Judge Julie Rikelman asked Puerto Rico Fiscal Agency and Financial Advisory Authority Attorney Peter Friedman if he knew of any examples of bankruptcy cases where the creditors’ “claim” was limited to less than the total face value of what had been promised to them before the bankruptcy.
PREPA Ad Hoc Group Attorney G. Eric Brunstad, Jr. said PREPA’s trust agreement was a “vanilla agreement” like hundreds of others, and as such, he said, it doesn’t make sense for the court to make a “one-off” interpretation of it.
If the bond parties retained the lien indefinitely, Kayatta said, restructuring would depend on their consent, a point Brunstad rebutted. If a judge found an offer “fair and equitable,” he or she could confirm it over the bond parties’ dissent, Brunstad said. The deal just has to pay the “value of the property.”
Therefore, he said, the fight should focus on the “value of the collateral” on the bankruptcy confirmation date, Brunstad said.
Brunstad took issue with board Attorney Martin Bienenstock’s statement bondholders legally could not have lien on something that doesn’t yet exist, namely future revenues. Brunstad said if Bienenstock’s argument was correct, it would “totally destroy” the fields of secured financing for inventory, after-acquired revenues, and others.
GoldenTree Asset Management Attorney Glen Kurtz said bond parties held two liens: one on the stream of revenue from PREPA’s customers and the other on money the authority deposits in the sinking fund.
“If I was an electric revenue bond issuer, I’d want PREPA to lose,” said Muni Credit News Publisher Joseph Krist. “The implications for other utility bond issuers are negative. If a revenue pledge as a basic covenant doesn’t work, what does?”
