Bonds

Bondholders, bond insurer Syncora Guarantee, bond trustee U.S. Bank National Association, and others launched new attacks on the Puerto Rico Oversight Board’s proposed Puerto Rico Electric Power Authority disclosure statement and plan of adjustment.

These groups and a committee of claim assignees for National Public Finance Guarantee-insured PREPA bonds all objected to the plan’s superior treatment of National’s insured bonds as compared to other PREPA bonds.

The board had submitted amended versions of the plan and disclosure statement earlier this month and the parties filed their objections Friday afternoon in the U.S. District Court for Puerto Rico, which is handling PREPA’s bankruptcy.

With fees and reimbursements included, the board is offering National an 83.36% recovery, the Ad Hoc Group of PREPA Bondholders said, while offering a 50% recovery for settling bondholders and a maximum 56.08% recovery for non-settling bondholders.

The offer is “unfair discrimination” and the disclosure statement “provides no basis for these wide disparities in recoveries,” the group said.

“A plan unfairly discriminates against a class of creditors when ‘creditors and equity interest holders with similar legal rights … receiv[e] materially different treatment under a proposed plan without compelling justifications for doing so,'” they group said, citing a 2011 court decision.

Giving one group of claimants “preferential treatment” is “an attempt to manufacture the illusion of meaningful creditor support for the plan by creating yet another questionable one-creditor accepting class,” the group said.

In the amended plan, the board revised the amount it believes PREPA can pay creditors but failed to provide the data in the disclosure statement to support the revision, the group said.

The group wants bankruptcy Judge Laura Taylor Swain to rule in these issues before the confirmation hearing. “Waiting months to address a patently unconfirmable plan would merely postpone the tough political decisions that PREPA will need to make to reach fair agreements with the vast majority of its creditors.”

Syncora said it is difficult for a judge to find a plan unconfirmable at the discovery statement stage, but, in this case, there is “easily” enough reason.

But Puerto Rico Attorney John Mudd doesn’t expect the judge to decide that immediately. “I think the judge will simply rule that they are objections to the plan of adjustment and will be left for another day,” he said. “She will probably ask for additional information to be added [to the disclosure statement], but nothing of import.”

Bond trustee U.S. Bank objected to the amended plan’s continued division of bondholders into subclasses without regard to the provisions of the trust agreement, the “dramatically different” offer to National, and the disclosure statement’s vagueness on key issues concerning the proposed series B bonds and contingent vehicle instruments.

The court has the right at the disclosure statement stage to require legitimate classification of PREPA bond claims, U.S. Bank said. “The Oversight Board cites no case in which pari passu bondholder claims under a single indenture are split into plan subclasses based upon a purported settlement of claims done in violation of the applicable indenture.”

“The Oversight Board’s one-off settlement approach not only assures a cramdown fight, but also sets the stage for other unproductive disputes about how the trust agreement’s governance, intercreditor, and distribution provisions are affected,” U.S. Bank said.

The plan also fails to provide adequate information to holders of insured National bonds, U.S. Bank said.

The plan authorizes National to treat policy obligations to insured bondholders in various ways. It releases National from further obligations to its bondholders, but fails to specify the release does not limit bondholder rights under National’s policies, as was done in the Highways and Transportation Authority plan of adjustment. This should be rectified, U.S. Bank said.

The plan should specify what National policies or other agreements or laws support National treating bondholders as it proposes.

U.S. Bank said since the value of the series B bonds will depend upon the terms and remedies to be set in the new master trust indenture, the board should file this before the court approves the amended disclosure statement.

Finally, a pair of investment firms that reached an agreement with National in December 2021 to gain some of National’s PREPA portfolio, jointly filed an objection to the disclosure statement. Like the other bondholder-related parties, they objected to the board’s superior offer to National. They ask that their claims be treated the same as National’s.

National did not immediately respond to a request for a comment.

The board, which defended its proposed plan and disclosure statement earlier in February, said it would file a response to these objections later Tuesday.

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