PREPA bond parties make offer and file suits

Puerto Rico Electric Power Authority bond parties that oppose the Oversight Board’s proposed debt deal filed suits challenging part of the deal, asked for compensation for Puerto Rico central government’s actions since March 2022 and proposed an alternate bond deal.

The parties filed the suits this weekend in the U.S. District Court for Puerto Rico and filed an informative motion Friday in the bankruptcy telling U.S. District Judge Laura Taylor Swain about their bond deal offer.

GoldenTree Asset Management and Syncora Guarantee sued Puerto Rico’s central government for actions taken since March 2022 to interfere with PREPA’s ability to pay bondholders. The court has yet to appoint a judge in that case.

The bond parties allege the commonwealth government has manipulated PREPA’s fiscal plans and budgets to deprive the bondholders of their claim on the authority’s revenues and depress the value of the bonds.

The board rejected former Oversight Board member Justin Peterson’s suggestion to use commonwealth financial surpluses for PREPA because the commonwealth didn’t owe the authority money.

Yet on Friday the bond parties said the board announced it would OK an amendment to the commonwealth budget to allow a $300 million loan to the authority to support payment of PREPA’s pensions. This undercuts the board’s position on the independence of the commonwealth and PREPA, the bond parties argue in their suit.

The suit against the commonwealth government, Gov. Pedro Pierluisi, Puerto Rico’s Fiscal Agency and Financial Advisory Authority, and FAFAA Executive Director Omar Marrero asks for monetary compensation but doesn’t specify how much is being sought.

 In a second lawsuit, GoldenTree and Syncora sued the Oversight Board and PREPA, alleging they illegally tried to buy creditor votes in a discriminatory plan of adjustment and asking that the offers be declared “bad-faith procurement” and the votes for the plan committed in this way be disqualified. The suit was filed as an adversary proceeding within the PREPA bankruptcy.

GoldenTree and Syncora complain that some bond party members of a group including BlackRock Financial Management would recover well over 40% of their asserted claims while non-consenting bondholders would only be given a 3.5% recovery.

The existing deal violates bankruptcy law because PREPA and the board “are obligated to treat similarly situated creditors alike,” their filing said.

In a third development this weekend, Assured and GoldenTree proposed an alternative financing for PREPA’s debt.

Whereas the current deal the board has worked out with the BlackRock group has them providing the cash to consummate the deal, and purchase Series B bonds from PREPA, the Assured/GoldenTree alternative would allow all bondholders the opportunity to purchase a pro rata portion of the Series B bonds. To the extent that there were not enough subscribers, GoldenTree promised to purchase them while also allowing other bondholders to purchase beyond their pro rata share.

The new proposal would save PREPA more than $1 billion in debt service payments and about $100 million in fees over the 35 year expected terms. The Series B-2 bonds would have a 6.125% interest rather than the 7.125% interest offered to the BlackRock group exclusively. The Series B-1 bonds would have a 5.5% interest rather than the 6% interest included in the BlackRock deal.

In the proposed new deal, in case of a default the bond parties would retain their rights to seek a receiver and would retain their unsecured claims based on equitable rights of performance. In the BlackRock deal those rights would be waived.

If the board were to accept the deal, the bond parties would retain their rights to appeal the deal after the U.S. District Court approves the plan of adjustment.

“The PREPA Plan of Adjustment proposed by the Oversight Board is a viable and fair debt restructuring,” the board said in a statement responding to the new offer and lawsuit. “A significant number of creditors agreed to the realistic terms and the Oversight Board continues to move forward in the confirmation process.”

Spokesman for FAFAA and Pierluisi didn’t immediately respond to a request for a comment.

U.S. District Judge Laura Taylor Swain will probably delay hearing the suit on the discriminatory treatment of creditors to the plan of adjustment hearing, currently expected in March, said Puerto Rico attorney John Mudd.

“The alternative finance proposal from GoldenTree and Assured clearly demonstrates that the Oversight Board conducted no market test for the BlackRock group’s proposed financing,” said Puerto Rico Clearinghouse Principal Cate Long. “Given the massive withdrawals from municipal mutual funds, including BlackRock, I don’t think they have the cash to fund it…. GoldenTree and Assured could easily raise the necessary cash through borrowings but BlackRock is restricted, for fiduciary reasons, through borrowing for speculative purposes.

“The vote buying adversary case is quite strong,” Long said.

A hearing on the board’s proposed disclosure statement is scheduled for Tuesday. The recent bond party filings may be a topic of discussion.