PREPA bondholders make the case for higher claims

A lawyer for the Puerto Rico Electric Power Authority bondholders argued Thursday that if a receiver had been in place early on in the PREPA bankruptcy process, they would have controlled him or her and therefore raised rates to repay bonds in full.

Assured Guaranty Attorney Mark Ellenberg argued that to be the case in the third and final day of the bond claim estimation hearing. It was in response to U.S. District Court Judge Laura Taylor Swain’s March ruling against a bondholder lien in which she also ordered the parties to explore what would have happened in July 2017 if the bondholders had sought a receiver for PREPA. Specifically, Swain directed the parties to argue how much money the bondholders would have received and to use this as a basis to determine the bondholders’ “claim.”

The Oversight Board in July 2017 put PREPA into the Title III bankruptcy process included in the Puerto Rico Oversight, Management, and Economic Stability Act. In her March ruling, Swain asked the lawyers to assume history had unfolded differently.

Swain is using the bond claim estimation process as a first step to determining how much money to award to bondholders. She currently plans to hold plan of adjustment hearings in late July.

Ellenberg said Swain had directed the parties to explore a hypothetical situation — how local courts treatment of the bondholders’ petition for a receiver, the bond’s Trust Agreement, and non-PROMESA laws would have affected their payout. His reading of her order was that she had directed the parties to effectively assume PROMESA, its Puerto Rico Oversight Board, and their fiscal plans did not exist.

To assume otherwise made no sense because if the board did exist, the day after the bondholders gained a receiver, the board would have filed for PROMESA Title III bankruptcy, taking control of the debt treatment, Ellenberg said.

If the assumption was that PROMESA existed “it makes the Trust Agreement not the touchstone but an irrelevancy because the board gets to prescribe whatever it wants to do and that is not what your honor ordered,” he said.

Ellenberg said opposing attorneys were arguing a PREPA receiver would be constrained by fiscal plan-specified spending guidelines and debt service payments.

On the contrary, “We have to treat this [claim] estimation as if PROMESA did not exist and the board did not exist,” he said.

He said a hypothetical receiver would have had real authority to set electric rates and thus bring in the revenues needed to pay off the bonds.

While none of the opposing attorneys directly addressed Ellenberg’s statement, they did contradict his position.

Board Attorney Martin Bienenstock said in the “real world,” the board would defend its PREPA fiscal plan. He said the board’s power under PROMESA “preempts” a receiver’s power.

Puerto Rico Fiscal Agency and Financial Advisory Authority Attorney Peter Friedman said Ad Hoc Group of PREPA Bondholders expert Maureen Chakraborty showed on Wednesday she was unaware the board could control the receiver in the hypothetical situation.

At the hearing Swain did not indicate her views on this topic.

During the hearing Tuesday bondholders argued they are owed $8.5 billion and the timeframe of being able to collect on their claim should continue in perpetuity. The board Thursday suggested Swain set a duration of bond repayment at 15 years or less. Following the scenario Swain has ordered, shorter bond durations would mean less money for the bondholders.

Chakraborty said bondholders could be paid in full if the restructured bond had a 27-year to 42-year duration, depending on assumptions one made.

In his testimony Ellenberg also said the board was willing to cut bond payments based on a variety of pessimistic projections but was not willing to consider including bond mechanisms that would pay more if demand conditions turned out better than expected.