Bonds

The lack of consensus on a proposed plan of adjustment risked dismissal of the Puerto Rico Electric Power Authority bankruptcy proceedings, District Court Judge Laura Taylor Swain warned parties Monday.

If proceedings are dismissed the immediate issue would be who would run the authority, said John Hallacy, president of John Hallacy Consulting. Would the bondholders continue with the existing parties, Genera and LUMA Energy, or would they seek others? PREPA would have to generate enough income to cover bond payments, he said.

Bondholders would probably accept a modest haircut, Hallacy said. But, he suggested, they should try to reach a deal now.

Swain criticized the Puerto Rico Oversight Board, Fiscal Agency and Financial Advisory Authority, Ad Hoc Group of PREPA Bondholders, and other parties for not participating in mediation in the last several months, but extended the mediation deadline to July 28.

If Swain were to dismiss the bankruptcy, “other litigation would continue,” said Puerto Rico Attorney John Mudd. A receiver would be appointed, and likely would try to get PREPA to raise rates, he said, starting a string that could lead to LUMA exiting its contract to distribute energy.

Swain said she expected negotiations, including “proposals and counterproposals. If the plan submitted is not “consensual nor reflective of” give-and-take, she said, “the court will have to consider carefully whether it would be a reasonable use of the court’s or the parties’ resources to permit PREPA to begin again at square one.”

She doesn’t “relish contemplating the possible dismissal of the case, as it would represent a colossal lost opportunity” for all involved.

There’s no guarantee the current proposal would be confirmed, Swain said, as opponents “have raised serious legal and factual issues that the court will have to consider, including concerns about the structure and classification scheme in the plan, whether one or more classes are valid impaired accepting classes, and whether the plan is fair and equitable and in the best interests of creditors.”

Although PREPA won “certain summary judgment issues in [Swain lien] order,” Swain said,”it did not prevail with respect to its broadest theories.”

Also, she noted, her “entire order will ultimately be subject to appellate review.”

Swain said her team told her several times in the last few months the parties are doing little or no mediation and she repeatedly directed them to engage, including at least three times in the last month.

Bondholders may be limited in recovery “by the terms of governing documents, commonwealth law and regulatory discrimination, the terms of a plan, and/or PREPA’s state,” Swain said.

The FAFAA responded, “The government has always been (and continues to be) willing and available to negotiate in good faith.”

The Unsecured Creditors Committee did not immediately respond to a request for a comment. The Ad Hoc Group declined to comment.

The Oversight Board stated its commitment to mediation and reaching a consensual plan, pointing to “all previous debt restructurings,” the board said. It called its offer “fair” to creditors while providing PREPA “the financial stability necessary to deliver reliable energy for Puerto Rico.”

Terms must bensustainable for PREPA and affordable for Puerto Rico, the board said.

“Judge Swain is publicly signaling to the Oversight Board that the PREPA plan of adjustment is not confirmable,” said Puerto Rico Clearinghouse Principal Cate Long.

She speculated Swain’s decision in the lien adversary — for an “unsecured net revenue bond” — could be reversed on appeal.

“Forcing mediation now would forestall the [First] Circuit [Court of Appeals from] having to remand the PREPA lien adversary [decision] and start the process over with bondholders in a much stronger position,” Long said.

On Friday, Board Chairman David Skeel confirmed mediation wasn’t occurring, but said there was direct communication with some PREPA parties.

Swain directed the mediation team to give her monthly reports beginning May 3.  

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