Judge pushes PREPA, creditors to negotiate deal in 60 days

Bonds

It is “critical” that the Puerto Rico Electric Power Authority and its creditors work toward a negotiated deal to resolve the bankruptcy, U.S. District Judge Laura Taylor Swain said in ordering the parties to continue negotiating for 60 days, at which point restarting the bankruptcy’s litigation on various legal and possibly evidentiary issues or dismissal of the case would be options.

Swain imposed a 60 day stay on litigation in the case at Tuesday’s hearing, the first since the U.S. Appeals Court for the First Circuit in June overturned most of Swain’s rulings concerning the authority’s $8.2 billion in bond debt.

Chief mediator Shelley Chapman told Swain meetings between the PREPA parties since the First Circuit decision had not been productive. “We’ve seen nothing,” she said.

U.S. District Judge Laura Taylor Swain ordered a 60-day pause in PREPA bankruptcy litigation and told the parties to attempt to negotiate a deal during the period.

“I must tell you the mediation team does not see a prospect for meaningful, serious negotiations between the parties,” Chapman said. “We’ve no reason to believe that either side is ready to move enough to facilitate a realistic settlement.”

The First Circuit is still considering a rehearing request and has not released a mandate from its ruling. Without this mandate, Swain said, she could not continue the case’s litigation. She added that she wants the parties to prove Chapman’s pessimism wrong.

If substantial progress isn’t reported in 60 days, Swain said, she would ask Chapman if she believed the stay should be continued.

If the answer is “no,” the judge said she’d consider restarting the bankruptcy’s litigation on various legal and possibly evidentiary issues.

Earlier in the hearing she said without a consensual plan of adjustment she’d have to consider dismissing the bankruptcy and leaving it to “multi-front litigation outside of this forum … in which every interest, including Puerto Rico’s, fends for itself.”

In April 2023, Swain also indicated her frustrations with the pace and progress of the bankruptcy and said at some point she might consider dismissal.

At the start of the hearing, Swain noted she had said “failure was not an option” several times. Years more of litigation would be a failure in several respects but most importantly a “failure to act with any degree of decency and compassion for the plight of over three million people, who are living in often unbearable heat, paying high bills for electrical service that is unacceptably unreliable and suffering through increasingly expensive failures of those charged with transforming their power system to accomplish discernable change.”

She said none of the parties’ written submissions charts a path to a conclusion of the case. Both sides include positions rejected by the First Circuit.

Swain said she was inclined to believe the Oversight Board’s stated intention to submit a tweaked proposed plan of adjustment was a bad idea. She said after the First Circuit’s decision and given the passage of time, the board’s valuation and data is unlikely to hold up.

Bondholders are being “expansively aggressive in their attack” and are “likely delusional” in some of them, Swain said. Despite their arguments, there doesn’t seem to be “meaningful” net revenues available.

Lawyers for the board and creditors disagreed about the issues in the bankruptcy and what should be done.

The board’s attorney said he planned to submit an amended plan of adjustment with two options, depending on how the First Circuit handled petitions for rehearing.

Ad Hoc Group of PREPA Bondholders Attorney G. Eric Brunstad, Jr., called a tweaked plan a waste of time, since neither his group nor the other non-consenting bond parties would accept it. He called on the board to offer a decent base recovery and a meaningful contingent vehicle instrument — that increases the recovery if electrical demands are greater than the board predicts — which he said might bridge the chasm between the two sides.

Assured Guaranty Attorney Mark Ellenberg said the board needs to raise its offer above $2.35 billion to pay PREPA’s debts.

Ellenberg, Brunstad, and Golden Tree Asset Management attorney Glenn Kurtz said they approved Swain’s call for negotiations.

Ellenberg said the last thing that Assured Guaranty wanted to do was to crush the island under an unmanageable PREPA rate structure and plan of adjustment. While he realizes Puerto Ricans are suffering, he said, Assured is entitled to fair treatment.

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