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With just under three weeks remaining before the litigation stay expires on Oct. 8, those involved in the Puerto Rico Electric Power Authority (PREPA) bankruptcy seem no nearer to finalizing a debt adjustment plan.
On Sept. 5, U.S. District Judge Laura Taylor Swain, presiding over the PREPA bankruptcy proceedings, granted an extension of the litigation stay at the mediation team’s request.
Originally, Swain imposed a 60-day stay during a July 10 hearing after the First Circuit Court of Appeals determined that PREPA’s bonds were backed by $8.5 billion in net revenues, reversing her earlier decision that recognized only a $2.4 billion unsecured claim. Swain cautioned the parties that their “level of intractability [did] not bode well for reorganization and forward momentum” and noted a “troubling element of denial of reality” among them.
The mediation committee is stepping in to facilitate discussions among creditors, the Financial Oversight and Management Board, and the Puerto Rico Fiscal Agency and Financial Advisory Authority.
Rolando Emmanuelli, an attorney representing PREPA’s employees and union in the case, is skeptical about reaching a consensus.
“I do not believe an agreement will come to fruition,” he stated.
The mediation reports submitted by the panel do not provide any indication of a forthcoming agreement.
While certain stakeholders and bondholders have settled on debt terms, another faction of bondholders argues that PREPA should compensate them at a minimum of $6 billion. This group achieved a victory when the U.S. Court of Appeals for the First Circuit determined that PREPA bondholders possess a secured claim of $8.5 billion against the utility’s present and future net revenues.
The First Circuit’s ruling followed a request from PREPA’s bondholders to overturn Swain’s previous ruling that acknowledged only a $2.4 billion unsecured claim against the $8.5 billion debt. In its June 12 ruling, the First Circuit court clarified that the trust agreement’s “preamble” served as a granting clause, not merely a prefatory clause, signifying PREPA’s explicit commitment to allocate revenues as security for bond payments.
This ruling affects the debt adjustment process since the oversight board has been negotiating settlements with various groups, including fuel line lenders and certain bondholders. During a recent hearing, Emmanuelli remarked that the oversight board claimed PREPA lacks the funds to service the debt.
“This situation makes it impossible to confirm the agreement,” he said.
Several options exist. Swain could potentially dismiss the entire bankruptcy case, compelling the oversight board to begin anew. If Swain were to lift the moratorium, bondholders might pursue litigation to appoint a receiver for PREPA.
However, even if bondholders succeed in court, that does not guarantee they will receive payment. Increasing rates to satisfy bondholders could lead to greater strain on funding for essential maintenance, pushing PREPA’s customers towards bankruptcy, solar solutions, or leaving Puerto Rico entirely. The situation of rising debt, plummeting sales, and increased rates for diminished service poses a significant risk of a second bankruptcy for PREPA, as indicated by the Institute for Energy Economics & Financial Analysis.
Conversely, if the electrical system receives the necessary time and resources to rehabilitate and establish itself sustainably, it could foster economic growth on the island and enable the assumption of new debt in the future.
