PREPA bondholders counter board position on administrative claim

Puerto Rico Electric Power Authority bondholders argued with the Puerto Rico Oversight Board’s position that the utility’s ability to pay a $3.7 billion administrative expense claim affects its validity.

“The central myth animating the board’s surreply is that the bondholders cannot assert an administrative expense claim unless they are able to execute on PREPA’s non-net revenue assets to satisfy the claim,” the bond parties told the U.S. District Court for Puerto Rico Friday evening. A creditor’s claim can be valid regardless of whether or not assets are available to satisfy it, they said.

Further, the bondholders said they are not seeking to seize PREPA’s physical assets like power generation stations.

The PREPA bonds were like special revenue bonds, with limited recourse, and to strip PREPA bondholders of their administrative expense rights would likely be unconstitutional but would also “impair the ability of municipal borrowers like PREPA to access financing,” the bondholders said.

The bond parties said the three cases District Judge Laura Taylor Swain asked them and the board to address all support their administrative expense claim.

The board argued the bankruptcy section of the Puerto Rico Oversight, Management, and Economic Stability Act the bondholders cite, “does not create claims” and, alternatively, no post-bankruptcy petition “transaction” occurred.

The bond parties said the section mandates allowance of administrative expenses for “the actual and necessary costs … of preserving the estate.” Further, there didn’t have to be an “express post-petition agreement authorizing the debtor to misuse property” for there to be a “transaction” breaching the creditors’ rights.

The board argued the bond parties cannot rely on PREPA’s prior performance because those records were based on interim information.

The bond parties say each interim financial report “was reviewed, and in June of each year the results were reported on an annual basis, so they were effectively finalized.” The annual revenue figures showed little variance from the audited financial statements, they said.

The bond parties argued PREPA reported net revenues in monthly reports for more than 20 years and this establishes a “course of performance” — a sequence of actions after the contract is signed courts use to determine the parties’ intentions and views.

The board said this was not the case for PREPA because Puerto Rico’s Uniform Commercial Code didn’t mention “course of performance.” The bond parties responded Friday the reported net revenues were a course of performance and Puerto Rico law and U.S. bankruptcy law require observation of course of performance.

The bond parties said their administrative expense claim should be paid in full and a plan of adjustment confirmed, and if the claim isn’t paid, the bankruptcy should be dismissed and a receiver installed if a negotiated settlement can’t be reached.

The First Circuit Court of Appeals ruled in December that bond parties had a lien on PREPA’s net revenues.

The bond parties that filed the response to the board were Assured Guaranty, GoldenTree Asset Management, Syncora Guarantee, National Public Finance Guarantee Corp., the PREPA Ad Hoc Group, and bond trustee U.S. Bank, N.A.