Rejecting nearly all of the challenges to its disclosure statement and plan of adjustment in the Puerto Rico Electric Power Authority bankruptcy, the Puerto Rico Oversight Board attempted to explain why National Public Finance Guarantee could get preferential treatment.

National’s treatment is permissible since it is supported by a “legitimate basis,” the board said, citing a 1994 court case.  National’s “rights differ from other bond claims as they have settled their claims to collateral security and negotiated for a custodial trust structure which necessitates separate classification.”

The Ad Hoc Group of PREPA Bondholders, bond trustee U.S. Bank N.A., and others said in court filings it was discriminatory and illegal to give National substantially superior treatment than other holders of PREPA bonds.

In the filing Tuesday, the board rejected nearly all the challenges, incorporating some small changes in a revised proposed disclosure statement that it submitted in the bankruptcy.

Pointing to a 1995 case, the board attempted to offset U.S. Bank’s claim had not cited a bankruptcy ruling in which “pari passu bondholder claims under a single indenture are split into plan subclasses,” in a manner that violate the relevant indenture.

Additionally, the claim of unfair discrimination should be considered at a later confirmation stage, the board said.

As for National’s recovery, the board suggested it was really 71.6% rather than the 83.4% the bondholder groups claimed. The higher figure incorrectly adds 3% compensation for National’s fees and expenses negotiating with the board, a 20% recovery on claims National has already paid out to PREPA bondholders, and 2.86% “in consideration for structuring of payments to holders of claims of the National insured bonds,” the board said.

The settling bondholders could receive as much as 100% recoveries, the board said, if one includes recoveries from the contingent vehicle instruments, depending on the outcome of the amended lien and recourse challenge and on how many bondholders elect to settle, which would give those bondholders a better recovery than National.

The non-settling bondholders may receive more than 56% if they win in their lien and recourse challenge and demonstrate that the value of their collateral exceeds the value of the bonds available to them, the board added. If that were to occur the board acknowledges its proposed plan may not be confirmable and the non-settling bondholders could get more than National.

The board submitted its proposed amended plan of adjustment and disclosure statement earlier this month. The board submitted its original proposed version of these in December.

A hearing on the disclosure statement in the U.S. District Court for Puerto Rico, which is handling the bankruptcy, is scheduled for Tuesday, where these issues will be further discussed.

The Ad Hoc Group of PREPA Bondholders did not immediately respond to a request for a comment for this story.

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