PREPA bondholders stake claim to future revenues

BY SourceMedia | MUNICIPAL | 11/22/22 04:18 PM EST By Robert Slavin

Puerto Rico Electric Power Authority bondholders, insurers and the PREPA bond trustee defended their lien on authority revenues in a bankruptcy adversary proceeding.

Responding to the Oversight Board's filing in the lien adversary proceeding, bondholders said their liens extend beyond money in the Sinking Fund and Self-Insurance Fund to revenues generally including future revenues and other money.

Citing the U.S. Bankruptcy Code, which says special revenues remain subject to liens resulting from security agreements entered prior to bankruptcies, they said, since the board agrees the bonds are "special revenue" bonds, this would apply to their claim.

Further, the PREPA Trust Agreement pledges the "revenues of the system" to the bond trustee, thus going far beyond the money of the sinking and self-insurance funds, they said. Section 805 of the PREPA Trust Agreement says after a default, the trustee has the right to payment from "any moneys then available or thereafter becoming available."

A 2015 PREPA financial statement and an Oversight Board statement in 2017 in a legal case, the bondholders said, both note PREPA pledged gross revenues minus limited exceptions to pay the bonds.

The bondholders said their liens were "appropriately perfected" in the "Authority Act" and Puerto Rico's Uniform Commercial Code. But even if they weren't, the liens would not be avoidable because "no judicial creditor could have obtained a lien on PREPA's revenues at the commencement of PREPA's Title III [bankruptcy] case."

In late October the board called for U.S. District Court Judge Laura Taylor Swain to make summary judgments on seven related counts and the bondholders are arguing that the board has not provided evidence to support those judgments.

The lien adversary proceeding addresses the nature of the bondholders' and bond trustee's lien on PREPA's revenues.

The motions for summary judgment should be denied, the bondholders also said, because the board failed to address the bondholders' and bond trustee's affirmative defenses. Those defenses include that the Takings Clauses in the U.S. and Puerto Rico Constitutions bar such actions. The court should address these defenses before it awards any summary judgments, the bondholders said.

The bondholders have said they are owed $8.3 billion in principal and billions of dollars more in unpaid interest. They have not been paid anything for six years.

Swain is letting the PREPA bankruptcy advance on three fronts: the board is required to propose a multi-option plan of adjustment by Dec. 1, the parties are engaging in mediation, and certain issues, like the lien issue, are being litigated.

The board declined a request for a comment on the bondholders' filing, saying it will respond in court.

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.