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The Financial Oversight and Management Board for Puerto Rico is addressing comments made by Corey Brady, the counsel for National Public Finance Guarantee Corp., during a conference held by the Puerto Rico Energy Bureau (PREB) on January 10 as part of the rate review procedure.
During the conference, National, which is one of the insurers of PREPA’s legacy revenue bonds, remarked that the figures regarding restructured debt and the rates needed to fund it, as outlined in the current Plan of Adjustment from the Puerto Rico Electric Power Authority (PREPA), rely on outdated data. National argued, interpreting a ruling from a federal appeals court, that the PREB should not overlook PREPA’s anticipated future debts when establishing the revenue requirement for repayment.
In a recent correspondence to the PREB, the oversight board expressed its disagreement with National’s reading of the U.S. Court of Appeals for the First Circuit’s decision. While the ruling recognized that bondholders could possess a perfected security interest in “Net Revenues” as defined in the Trust Agreement controlling the bonds, the oversight board contended that this interest is confined to the difference between the funds PREPA receives from rates determined by the PREB and its current expenditures.
Moreover, the oversight board noted, the First Circuit recognized that bondholders cannot presently hold a perfected lien on revenues that PREPA has yet to earn. The valuation of the secured claim available to bondholders will be resolved by the Title III bankruptcy court during the confirmation of an amended Plan of Adjustment.
In conclusion, the oversight board stated, the First Circuit’s ruling does not endorse National’s interpretation, and the permissible portion of the bondholders’ claim might be lower than the total principal outstanding and may exclude unpaid interest. The board estimates that the allowable secured claim for the non-settling bondholders is “quite moderate and will be settled in accordance with the law,” “[w]hether the non-settling bondholders’ allowable secured claim is confined to existing Net Revenues or the present value of anticipated future Net Revenues …”
“Additionally, the First Circuit determined that bondholders do not possess any unsecured deficiency claim against PREPA or its other assets,” the oversight board articulated in a recent letter to the PREB. “Hence, their claims are confined to the value of the Net Revenues securing their claims, to be assessed by the Title III Court during the confirmation of an amended Plan of Adjustment.”
The 2023 Fiscal Plan provides an analysis of debt sustainability concluding that the maximum debt PREPA could maintain based on the information available in the 2023 Fiscal Plan is $2.5 billion. This figure was subsequently raised to approximately $2.6 billion due to new information regarding income and energy consumption of a median income, unsubsidized household client of PREPA.
The oversight board expects to certify an updated fiscal plan for PREPA in the forthcoming weeks.
