PREPA hearing begins; deal reached to restructure AES bonds

Nearly seven years after the Puerto Rico Electric Power Authority went into bankruptcy, the restructuring entered its potential final stage with arguments over the proposed plan of adjustment’s legality and assumptions.

In a separate PREPA development, the Puerto Rico Oversight Board approved a municipal bond restructuring for PREPA’s private power supplier AES Puerto Rico, which sells power to PREPA.

The plan would restructure $144.6 million of outstanding cogeneration facility revenue bonds AES defaulted on last summer into $115 million of new series bonds. The Puerto Rico Industrial, Tourist, Educational, Medical, and Environmental Control Facilities Financing Authority (AFICA) is the issuer on both sets of bonds.

Additionally, the board is authorizing an “emergency bridge financing” of $23 million for operational needs and capital expenses to AES.

AES has been under financial pressure since Puerto Rico required it to export its coal ash from its sole (coal-fired) power plant.

A board spokesman said court system would not have to sign off on the restructuring.

At the plan of adjustment confirmation hearing, Oversight Board attorney Martin Bienenstock defended the plan and urged confirmation. The board, he said, wanted to pay back as much debt as possible but was limited by the amount it could raise electric rates.

The plan cuts the authority’s debt, except for pension obligations, from $15 billion to $2.365 billion, Bienenstock said. If the PREPA deal were too generous, the island’s economy could go into a “death spiral.”

Board attorney Margaret Dale said many parties support the plan, including the fuel line lenders, fuel supplier Vitol, the Unsecured Creditors Committee, and holders of 44% of the outstanding bond debt. The settlements the board reached with several parties are the “backbone” of the deal.

Board attorney Ehud Barak attempted to address bondholder complaints that the different treatment of bonds was discriminatory by noting in the Detroit bankruptcy the court ruled if each debt settlement was “reasonable,” the “plan must be fair.”

PREPA fuel line lenders attorney Emil Kleinhaus said since the authority considers the fuel lines current expenses, they are different than the bondholders and it justifies the plan’s superior treatment of them.

Assured Guaranty attorney Mark Ellenberg said it was “nonsense” the fuel line lenders are given current expense status since the loan was made seven years ago and was not exclusively for fuel.

Unsecured Creditors Committee attorney Luc Despins said the bondholders misrepresented the unsecured creditors recovery as 42%, since it will likely be around 9.8% and these creditors would have to wait years for their distribution while bondholders will be paid immediately, he said. The UCC supports the plan.

Puerto Rico Fiscal Agency and Financial Advisory Authority attorney Peter Friedman said electric rates would have to be increased beyond the plan’s proposals to get the bondholders their money and those increased rates would hurt Puerto Rico’s economy. Bondholders’ experts fail to account for future contingencies, he said.

Speaking in opposition to the plan, GoldenTree Asset Management attorney Thomas Lauria said the board sought to “wipe out” $4.6 billion of revenue bond debt on a “non-consensual” basis with $140 million in cash. This would be a result “without precedent.” The board’s proposal isn’t confirmable as a matter of law, Lauria said.

The plan gives early settlers better treatment and nowhere does the bankruptcy code say this can be done, he said.

It’s likely the plan would give the unsecured claimants a substantially better recovery than bondholders and that contradicts applicable bankruptcy code, Lauria said.

GoldenTree attorney Glen Kurtz said the board’s experts and PREPA’s fiscal plan underestimates the authority’s debt capacity. The board and its expert have focused on 6% of personal expenses as being the proper maximum level to expect consumers to pay for electricity.

Kurtz suggested they should look at shelter and electricity together, which experts sometimes say should not exceed 30% of expenses. The median value in Puerto Rico is 13.4% and this leaves a substantial margin to increase rates, he said.

The board’s electric study excludes $5 billion of anticipated savings, is overly pessimistic in predicting load demand, and predicts a 30-year recession for Puerto Rico, Kurtz said.  

PREPA Ad Hoc Group attorney G. Eric Brundstad, Jr., said bankruptcy code incorporated into the Puerto Rico Oversight, Management, and Economic Stability Act says there must be the same treatment for all claims of a single type. The proposed plan of adjustment breaches the law, he said.

Assured Guaranty attorney Sean O’Shea said the board has been working in the last few years to “bludgeon” PREPA bondholders. It has used its experts as “puppets on a string” to achieve the goal.

If one makes slight adjustments to the assumptions behind the board experts’ reports, one finds a great deal more money is available for bondholders, O’Shea said.

Meanwhile, all PREPA parties are waiting for the ruling of the U.S. Court of Appeals for the First Circuit on bond parties’ appeal of U.S. District Court Judge Laura Taylor Swain’s decision last March they had a very narrow lien on PREPA revenues. In mid-February Swain rejected their request for a pause to the confirmation hearing to wait for an appeal decision.

“In my opinion if the circuit [court] determines the PREPA bonds are secured it means the plan is unconfirmable,” Puerto Rico Clearinghouse Principal Cate Long said. “The Oversight Board asserts that the $2.6 billion is all it can pay creditors and so the plan must go effective regardless of how the circuit rules. That’s not how PROMESA works.”