In October of 2018, insurers of PREPA’s bonds filed a motion seeking relief from the automatic stay to appoint a receiver for PREPA based on allegations of mismanagement. The bond insurers contend that PREPA’s bondholders hold a lien on PREPA’s current and future pledged revenues.
On March 27, 2019, the Committee filed its objection to the insurers’ motion. As explained in more detail in the objection, the Committee believes that PREPA’s $8.3 billion of outstanding bonds are at most secured by approximately $33 million of net revenues deposited in certain funds created under the trust agreement governing PREPA’s bonds. Contrary to the bond insurers’ allegation, PREPA’s bondholders are not secured by PREPA’s current or future gross revenues and their right under the trust agreement to seek appointment of a receiver is not a property right for which they are entitled to adequate protection under the Bankruptcy Code. Thus, because the bondholders’ collateral has not diminished in value, under applicable Supreme Court precedent, the bond insurers’ motion should be denied.
Subsequently, litigation of the receiver motion was postponed following entry into a restructuring support agreement (RSA) and related settlement motion by an among Oversight Board, PREPA, AAFAF, the ad hoc group of PREPA bondholders, and bond insurer Assured.
The Committee believes that the future management of PREPA and the treatment of PREPA’s secured and unsecured claims should be resolved in the context of a plan of adjustment. In this regard, if PREPA’s bondholders are unsecured or heavily undersecured (as alleged in the objection), it may mean that they are entitled to far less favorable treatment in any PREPA plan of adjustment, leaving more resources available for unsecured creditors. The issues of the true extent of PREPA’s bondholders’ liens and which of PREPA’s assets the bondholders have recourse to are critical to the appropriate resolution of PREPA’s Title III case.
Given the issues surrounding the PREPA non-recourse bondholders’ liens that the Committee raised in its objection to the receiver motion, the Committee does not believe that PREPA non-recourse bondholders should be entitled to the favorable treatment provided by the RSA, which, among other things, permits supporting bondholders recoveries of approximately 86% of the face amount of their claims (and, under certain conditions, even greater than 90%). Moreover, the Committee opposes a number of other terms of the RSA. Therefore, on October 30, 2019, the Committee, filed its objection to the Government Parties’ settlement motion.