With litigation stay slated to end, parties in PREPA bankruptcy case appear far from reaching deal

U.S. District Judge Laura Taylor Swain

By The Star Staff

With less than three weeks left before the litigation stay is to expire on Oct. 8, stakeholders in the Puerto Rico Electric Power Authority (PREPA) bankruptcy appear to be no closer to reaching agreement on a debt adjustment plan.

U.S. District Judge Laura Taylor Swain, who is overseeing the PREPA bankruptcy process, on Sept. 5 extended the litigation stay at the request of the mediation team.

Swain initially ordered a 60-day stay at a July 10 hearing after the First Circuit Court of Appeals found that PREPA’s bonds were secured by $8.5 billion in net revenues, overturning her prior ruling that they were backed only by a $2.4 billion unsecured claim. Swain had told parties that their “level of intractability [did] not bode well for reorganization and forward momentum” and that parties were indicating a “troubling element of denial of reality.”

The mediation committee is intervening in negotiations between creditors, the Financial Oversight and Management Board and the Puerto Rico Fiscal Agency and Financial Advisory Authority.

Rolando Emmanuelli, a lawyer who represents PREPA’s workers and union in the case, believes the parties will not be able to reach an agreement.

“I don’t think there will be any agreement,” he said.

The mediation reports filed by the panel do not indicate whether an agreement will be reached soon.

While some of PREPA’s bondholders and stakeholders have reached an agreement for a debt settlement, there is a group of bondholders that insist PREPA should pay them at least $6 billion. Those bondholders won a victory when the U.S. Court of Appeals for the First Circuit in Boston found that holders of PREPA bonds have a secured claim of $8.5 billion against the utility’s current and future net revenue.

The First Circuit ruling came after PREPA’s bondholders asked an appeals court to overturn Swain’s ruling that found they had only a $2.4 billion unsecured claim on their $8.5 billion debt. In its June 12 opinion, the First Circuit court confirmed that the trust agreement’s “preamble” functioned as a granting clause rather than a prefatory clause, indicating PREPA’s unequivocal promise to pledge revenues as security for bond payments.

The decision impacts the debt adjustment plan because the oversight board engaged in settlements with different groups such as fuel line lenders and some of the bondholders. At a recent hearing, Emmanuelli noted, the oversight board insisted PREPA does not have money to pay the debt.

“All of this renders the agreement unconfirmable,” he said.

There are several alternatives. Swain could dismiss the entire bankruptcy case, forcing the oversight board to start from scratch. If Swain lifts the moratorium, bondholders could continue litigation to impose a receiver for PREPA.

Even if the bondholders win in court, that doesn’t mean they will actually get the money. Raising rates to pay bondholders will result in more pressure to starve the system of funds for necessary maintenance and will drive PREPA’s customer base toward going out of business, going solar, or leaving Puerto Rico. More debt, rapidly declining sales and higher rates for worse service are conditions that will place PREPA at high risk of a second bankruptcy, according to the Institute for Energy Economics & Financial Analysis.

On the other hand, an electrical system that is given the time and resources needed to recover and become a going concern could support the island’s economic growth and take on new debt in the future.