PREPA bondholders argue for better payment in appeals court

Puerto Rico Electric Power Authority bond parties argued in appeals court briefs that their trust agreement clearly gives them a lien on incoming revenues and supports their claim for the $8.5 billion pre-bankruptcy principal rather than the $2.4 billion set by a lower court judge.

The parties argued about the language needed to establish a revenue bond lien and the wording in the trust agreement Monday in U.S. Appeals Court for the First Circuit.

Other points of contention were U.S. District Court Judge Laura Taylor Swain’s interpretation of the PREPA bond trust agreement, her ruling PREPA was not required to act as a trust for the bondholders and her contention that Puerto Rico law prohibits a lien on future revenue.

The appeal also touched on her method for calculating bondholders’ claim on revenue, among other things. The appeal was filed in November.

The PREPA Ad Hoc Group, bond trustee U.S. Bank N.A., GoldenTree Asset Management and Syncora Guarantee together, and Assured Guaranty filed separate briefs covering much of the same ground and frequently making the same arguments. U.S. Bank N.A. filed a comparatively short brief, saying it supported the arguments made by the others. 

Additionally, the judge handling the appeal granted an expedited hearing and set oral arguments for Jan. 29.

Swain plans to hold the PREPA plan of adjustment confirmation hearing in early March. She denied a request from bondholders for a lien on incoming revenues.

The Puerto Rico Oversight, Management, and Economic Stability Act, “provides for expedited consideration of appeals and it is in the interest of all parties to have the issues decided before the hearing on the PREPA plan of adjustment,” said Puerto Rico Attorney John Mudd.  

Swain had said the trust agreement pledging PREPA revenues to the bondholders constituted only an “unsecured promise” and not a perfected security interest because it lacked the words “lien” or “charge.” But the Ad Hoc Group said trust agreements and the U.S. bankruptcy code interchangeably use the words “pledge” and “lien.”

Assured Guaranty said the trust agreement itself uses “pledge” and “lien” interchangeably, and other parts of the trust agreement refer to the initial revenue pledge as a “lien.”

The trust agreement was created in 1974 and use of the term “pledge” was common in the 1970s to create liens on revenues, according to municipal advisor Robert Lamb, the GoldenTree group said. Multiple court decisions found there were no “magic words” needed to create a security interest, the group said.

Swain said the pledge of revenues was modified by the words “as follows,” Assured Guaranty said the words “as follows” came well after the pledge statement and aims to modify a clause involving the parties’ mutual covenants.

While Swain said bondholders had a lien on just $20 million in PREPA’s sinking fund, the GoldenTree group noted the lien was listed as “further security,” which makes no sense unless they also had a security interest on incoming revenues, the PREPA Ad Hoc Group said.

The PREPA Ad Hoc Group pointed to a section of the trust agreement that says “all moneys” received by PREPA “shall be held in trust,” and claim Swain ignored the words “all moneys.”

“It will be interesting to see how the Oversight Board explains how they previously agreed in court filings that PREPA bonds were secured and then years later changed direction,” Puerto Rico Clearinghouse Principal Cate Long said.