Critics say board’s PREPA position undermines revenue bonds

Puerto Rico Oversight Board member Justin Peterson and other observers of the Puerto Rico Electric Power Authority bankruptcy criticized what they said was the board’s attack on U.S. revenue bonds in the lien adversary proceeding and called for state attorneys general to intervene.

“The board’s actions and arguments in the PREPA lien adversary proceeding are undermining our national revenue bond financing markets,” said Peterson.

In the PREPA lien adversary proceeding, the board is trying to get bankruptcy Judge Laura Taylor Swain to rule bondholders have a claim to only funds held at PREPA, while bondholders say PREPA pledged its future revenue as security in case it defaulted.

“Bondholders, in general, buy revenue bonds because the bonds are seen as secured by future revenues,” Peterson said. “The board is upending this assumption through its reckless lien challenge.”

At the start of February, the board sent an offer to uninsured bondholders asking them to accept a minimum 50% payout, or risk being paid 0.21% if Swain rules for the board in the lien challenge.

An institutional investor who held Puerto Rico bonds, who declined to be identified, said the board doesn’t “care that their reckless lien challenge may produce collateral damage beyond [the Puerto Rico Oversight Management and Economic Stability Act] and undermine basic financing standards of U.S. public finance.”

“If I were considering buying revenue bonds, I’d look at this PREPA case carefully,” Peterson said. “Why would I buy any revenue bonds if the board prevails on its arguments that revenue liens are invalid and PREPA bondholders are only entitled to what is in the sinking fund?”

A board victory would be “bad for the future of infrastructure financing in the United States,” Peterson said. “States and municipalities have an interest in this case. They need to have people buy their bonds.

“If I were a state attorney general, I would be watching this case closely and consider getting involved to protect the interests of my state and municipalities,” Peterson said.

The institutional investor said, “If negotiations fail, the ensuing trial could result in a harmful precedent that would call a large number of revenue bonds into question.” The investor added, “state attorneys general should be alarmed by these potential consequences and rise in opposition to this scurrilous attack on their financing tools.”

A bankruptcy attorney familiar with the situation, who declined to be identified, said state attorneys general “should intervene” if they “care about the sanctity of revenue bonds and the ability of governmental entities to raise capital that way.” Timing, the attorney said, is important since Swain “has competing summary judgment motions under advisement.”

Another issue for the attorneys general, the attorney said, is “what many consider an unauthorized settlement offer done outside of the auspices of the bankruptcy court disclosure statement approval process.”

Another attorney involved in the PREPA case who also declined to be identified said attorneys general probably can appear as amicus curiae (friend of the court) since they have no standing in the case.

The board, Peterson said, has promoted “ideology over the law, bias against creditors, and constantly moving the goalposts.”

The institutional investor said the board members’ “divisive tactics, evidenced by striking a deal with National [Public Finance Guarantee] they didn’t adequately disclose while negotiating with other similar creditors, betray [PROMESA’s] goals of respecting contracts and regaining market access.”

The Oversight Board said it “is fulfilling its statutory requirement under PROMESA to restructure this unpayable debt.”

It called its plan of adjustment “feasible for PREPA and Puerto Rico,” since it “considers the best interest of all creditors and offers to settle bondholders’ claim for a fair return under very difficult circumstances.”