Bonds

The Oversight Board’s proposed plan of adjustment is not “patently” illegal and the judge in the Puerto Rico Electric Power Authority bankruptcy said she would approve the board’s related proposed disclosure statement with minor revisions and directed the parties to engage in more mediation.

Judge Laura Taylor Swain, in an oral ruling in Tuesday’s disclosure statement hearing in the U.S. District Court, said the statement has enough information for creditors and the underlying plan is not “patently unconfirmable.”

Regarding the Ad Hoc Group of PREPA Bondholders’ and the bond trustee’s complaint the plan would provide disparate and discriminatory treatment of bonds, Swain said she previously ruled that an earlier court decision requiring strict classification of treatment classes did not apply to Puerto Rico Oversight, Management, and Economic Stability Act Title III bankruptcy cases.

The Ad Hoc Group and bond trustee said PROMESA requires an approved plan be in the best interests of creditors, which would bar the board’s current plan.

The bondholder groups did not prove the voting classes couldn’t be set that way it had or that the monetary distribution to any voting class would be insufficient, the judge said. Whether the proposed voting classes are lawful and confirmable will be decided later, Swain said.

Swain also overruled objections to the disclosure statement based on claims the voting classes were gerrymandered to create accepting classes, there was an impermissible solicitation of votes, and the board’s alleged bad faith.

While Swain was concerned about the gerrymandering claim, she said it was unclear if this happened and the objection was “premature.” She also noted four classes of creditors have committed to accepting the proposed plan.

Bond trustee U.S. Bank N.A. had argued the plan was inconsistent with the bond’s trust agreement. Swain overruled this objection but said the trustee could raise it again in the confirmation process.

Swain ordered the board to release the proposed new master indenture for the restructured bonds no later than three weeks before voting deadlines on the PREPA plan.

While Swain is hoping the parties reach a consensus, “that won’t happen,” said Puerto Rico Attorney John Mudd. “The bondholders’ recovery will depend on what she decides on the liens and recourse [issues].”

“From her comments, I think she will decide the lien is valid but under-collateralized as the Oversight Board’s plan of adjustment proposes,” said Puerto Rico Clearinghouse Principal Cate Long. “In my opinion this would be contrary to PROMESA’s confirmation requirements and bondholders will have to choose between appealing the adversary decision or fighting it out at confirmation.”

On the claim that National Public Finance Guarantee “is receiving better recoveries than others with the same claim,” Long said, “Swain signaled she is very open to hearing that argument in confirmation proceedings. There is no outcome where bondholders would receive less than a penny.”

On Monday the board announced that less than 1% of PREPA bondholders accepted the board’s settlement offer in Class 1 in the plan of adjustment. The offer would provide them with at least a 50% recovery, the board said.

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