Bonds

Puerto Rico Electric Power Authority bondholders say they are owed $8.5 billion and the timeframe of being able to collect on their claim should continue in perpetuity.

That was a central point of contention during Tuesday’s PREPA bond claim estimation hearing during which lawyers for the bondholders and the Oversight Board argued about what the appropriate duration is and whether the amount the bondholders are owed hinges it.

Currently, the board’s chief expert has estimated the bondholders’ claim to be $2.1 billion.

U.S. District Judge Laura Taylor Swain, who is overseeing the bankruptcy, said that estimating the size of the claim is the first step to deciding how much to give them in a final plan of adjustment.

In earlier briefings and once again on Tuesday, the board’s attorneys argued the bondholders’ trustee was governed by New York law’s 20-year limit on claims.

Bondholders said their claim continues forever and given this assumption the claim must be for the full $8.5 billion they are owed.

Bondholder attorneys told the court that both their primary expert and the Puerto Rico Oversight Board’s primary expert agreed the money could be paid back if there are no time limits placed on repayment.

Board Attorney Margaret Dale said while it is true its chief expert said this, it requires an assumption that PREPA would continue to pay the existing bond claims for over a century and Swain questioned whether such a timeline was reasonable.

Bondholder attorneys argued the New York law only addresses monetary claims and not equitable claims.

If it weren’t for the provisions of the Puerto Rico Oversight, Management, and Economic Stability Act barring the bondholders seeking a receiver for PREPA, the bondholders would have sought one after PREPA was put in bankruptcy in July 2017. The receiver would have increased rates and the resulting money would have been used to pay the bonds in full, making it what Madden said was an equitable claim.

Board Attorney Daniel Desatnik said the bondholders’ chief expert’s estimation of their claim size failed to account for $1.6 billion that must be used for the authority’s pensions, $660 million for vendor obligations, and $220 million for constructing the Aguirre Offshore Gas Port.

In a discussion of the relative priority of bond payments in comparison with other PREPA expenses, Swain asked Assured Guaranty Attorney William Natbony if only legally defined “current expenses” could be paid before bond expenses. He said he objected to the board’s practice of defining all possible expenses as “current expenses.” He said the board has flipped its position on the payment of fuel line lenders from not being a current expense to being one because the board reached a deal with them.

Ad Hoc Group of PREPA Bondholders Attorney Gary Orseck also said the board’s chief expert assumes only one inflation rate adjustment upward. Orseck noted the bondholders’ chief expert more aggressive estimated scenarios (of her six scenarios), she included an inflation adjustment on ability to pay in coming years.

Orseck said if one adjusted for the various errors to the board’s chief expert’s estimate of PREPA ability to pay, one would find PREPA could pay $19.3 billion to the bondholders, more than double the $8.5 billion claim.

The bondholders have argued the board’s estimates of money available for paying debt are too pessimistic and the proposed new bonds would lack basic protections for bondholders, increasing the risk they would default and lowering their potential value on the secondary market. 

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