Bond parties argue for PREPA administrative claim

Bond parties in the Puerto Rico Electric Power Authority bankruptcy filed arguments for their minimum $3.7 billion administrative expense claim in the First Circuit Court of Appeals.

They are seeking to have the appeals court overturn U.S. District Court Judge Laura Taylor Swain's March ruling that rejected their claim.

Assured Guaranty (AGO) and the bond trustee U.S. Bank N.A. filed separate briefs making their arguments Thursday. A broad group of other PREPA bondholders including AllianceBernstein LP, Aristeia Capital, BNY Mellon, Goldman Sachs Asset Management, Invesco Advisors, Luxor Capital Group, T. Rowe Price (TROW) and others filed a brief Friday.

Friday's brief argued the bondholders have a protected property interest in their collateral, which they said was PREPA's net revenues. The First Circuit has ruled that they have a lien on the net revenues, they pointed out.

They said the nature of the collateral is "clear" ? it is the net revenues as designed by PREPA's monthly operating reports from the start of the bankruptcy in 2017 to 2023, when the net revenues ceased to be reported.

At other points in the bankruptcy they have argued that their claims on net revenues extend beyond the end of the memorandum period, June 2023.

The bondholders argued that courts have made clear when a debt causes injury during bankruptcy, the injured party is entitled to compensation in the form of an administrative expense claim. The bondholders said Swain constructed section 503(b) of Chapter 11 bankruptcy narrowly to deny such relief. However, that isn't how the U.S. Supreme Court has construed the remedy.

Because it was fairly possible to interpret statutory provisions as authorizing an administrative expense claim in this instance, the court was required to do so to avoid a conflict with the U.S. constitution, the bondholders said. The First Circuit has repeatedly interpreted PROMESA as not destroying lien rights.

Finally, bondholders said they didn't contract away their constitutional rights or other rights. The bond trust agreement and Puerto Rico statutes provide bondholders with many remedies.

In Assured Guaranty's (AGO) brief the bond insurer said, "The Supreme Court has long recognized that liens are traditional property rights that may not be impaired under the constitution absent just compensation, even in bankruptcy." Congress in Chapter 11, section 928(a) preserved liens on post-petition special revenues.

The Puerto Rico Oversight Board, PREPA's representative in the case, has conceded in other litigation that administrative expense claims are an appropriate means to provide just compensation when secured creditors' property are impaired, Assured Guaranty (AGO) said.

Swain's "central rationale for rejecting this claim was that the bondholders entered no consensual post-petition 'transaction' with PREPA. But courts routinely recognize that a debtor who obtains a concrete benefit from using, expending, or damaging the collateral has engaged in the necessary post-petition 'transaction,'" Assured Guaranty (AGO) said.

The bond insurer said a 1968 Supreme Court decision supported its administrative expense claim.

Finally, Swain was wrong in saying the bondholders were not vigilant in defending their rights, Assured Guaranty (AGO) said. They made many efforts since the start of the bankruptcy to lift the stay, gain receivership and gain adequate protection on its lien.

The bond trustee U.S. Bank N.A. filed a much shorter brief making similar arguments as the other two briefs.

National Public Finance Guarantee and together, Goldentree Asset Management and Syncora Guarantee, also filed briefs in the case.