Bondholders say FOMB rejected proposed settlement offer without engagement

Judge Laura Taylor Swain

By The Star Staff

As Title III Court Judge Laura Taylor Swain said Wednesday it “would be the best Christmas present ever” if stakeholders could agree on a deal to settle the $9 billion Puerto Rico Electric Power Authority (PREPA) debt, the Financial Oversight and Management Board rejected a deal proposed by bondholders.

PREPA non-settling bondholders, including GoldenTree Asset Management LP, Assured Guaranty Inc. and National Public Finance Guarantee Corp, said the FOMB rejected a settlement offer they made without engagement, Marc Ellenberg, an attorney for Assured Guaranty, said at the omnibus hearing Wednesday.

Just as STAR reported earlier this week, GoldenTree Asset Management attorney Thomas Lauria said they will accept 50-year replacement bonds that have virtually no risk of future default. The amount of those bonds would be set on the basis of reasonable up-to-date load and other projections.

They also said they want to get additional bonds for the shortfall between what they are owed and the amount of the replacement bonds but these bonds would only get paid from excess cash flow, if there is any, and would be retired in 50 years whether or not the bondholders have been paid anything.

The bondholders also have agreed to provide $2.5 billion of new 50-year revenue bond funding to begin paying for needed repair and improvement of PREPA’s electric generation and distribution system; and for the duration of the replacement and new 50-year bonds, electric costs would be set and held at a level the Board has stated would be fair and affordable, subject to being increased only to fund cost overruns or needed capital expenditures not covered by our new bonds or the $15 billion of FEMA funding.

Lauria said pensions would be paid by having a senior position on a portion of PREPA’s revenue. Electricity rates would be set at or below the FOMB’s target and could only be raised above a 6% share of wallet if there were cost overruns or if the USD 2.5bn in capital proved insufficient for the authority’s needs.

The FOMB rejected the offer out of hand, said Ellenberg.

“What’s most amazing to me about that, we can’t get engagement on that, it was just simply refused,” Ellenberg said. “There is only one way out and that is settlement, we sincerely hope we can get there. If we cannot get there, it’s going to be messy, bloody and long.”

PREPA’s mediation team indicated in a report Dec. 9 that there is no chance for a consensual deal.

The FOMB has asked for reconsideration, for the second time, of a First Circuit Court of Appeals ruling that bondholders had perfected security interest in the power utility’s future net revenues.

Ellenberg noted that the possibility of a settlement had taken “a giant step back” after FOMB attorney Martin Bienenstock said that even if the First Circuit ruled in favor of bondholders a third time, the district court overseeing the bankruptcy, would have to decide if a secured claim exists on future revenue.

Ellenberg said the issue is before the First Circuit, charging that Bienenstock’s remarks indicate he plans to reargue the issue under another scheme. At the hearing, the bondholders contended possible constitutional violations as they have no protection against PREPA taking their collateral.

Bienenstock said that the lack of a deal after seven years of the PREPA’s bankruptcy is because it is a very difficult situation.

Swain insisted the parties work their way toward a consensual resolution. She has the option to either dismiss the case or do a cram down, both of which will result in more litigation.