The Oversight Board, AAFAF, and PREPA (the “Government Parties”) have entered into a binding restructuring support agreement (RSA) with certain of PREPA’s bondholders and monoline insurers and have filed a motion (the “Settlement Motion”) seeking an order from the Title III court approving the RSA.  Subsequently, the Oversight Board filed supplemental pleadings and declarations in support of the Settlement Motion.

Generally speaking, the RSA provides that bondholders will agree to settle their claims against PREPA and their litigation seeking a receiver at PREPA and, in addition, will agree to vote in favor of PREPA’s Title III plan of adjustment.  In exchange, the Government Parties have agreed to propose a plan of adjustment that restructures PREPA’s bond debt on terms agreeable to the supporting bondholders by means of an exchange of PREPA’s outstanding bonds for new securitization bonds (on the terms set forth in the RSA and related documents).  In addition, in the RSA the Government Parties have agreed to provide supporting bondholders with certain settlement payments, administrative claims, and fee reimbursements.

On October 30, 2019, the Committee filed its objection to the Settlement Motion.  As explained in more detail in the objection, the Committee believes the settlement embodied in the RSA is, simply put, a terrible deal for PREPA that is far too generous to bondholders.  Bondholders would receive under the RSA recoveries of approximately 86% of the face amount of their claims (and, under certain conditions, even greater than 90%).  In nominal dollars, this results in payments of over $20 billion to bondholders over the next several decades or longer—in fact, because the new securitization bonds have no maturity date, PREPA could potentially be making payments to bondholders (including for interest due on past due interest) forever.  Bondholders’ legal claims are far too weak to merit this type of settlement recovery.

In addition, the Committee’s opposes the settlement on a variety of other grounds.  For example:

  • Various benefits that the Government Parties argue will flow from approval of the RSA, such as confirmation of PREPA’s plan, PREPA’s transformation/privatization, and improved macroeconomic conditions for PREPA and Puerto Rico, are so speculative as to be illusory.
  • The proposed settlement is not in the interests of PREPA’s creditors.  It was the result of a one-sided negotiation process from which the Committee and other non-bondholder creditors were excluded and appears to impermissibly restrict PREPA’s ability to pay other, non-bondholder creditors.  No creditors or other parties in interest that are not bondholders support the proposed settlement.
  • The RSA constitutes an impermissible “sub rosa plan” under the bankruptcy laws.  In other words, the RSA dictates the contents of PREPA’s Title III plan of adjustment without providing the various protections for creditors, including rights to receive certain disclosures and to vote on confirmation, that are required as part of the plan process.
  • The proposed settlement contains a number of terms and conditions that are illegal and/or clearly not in PREPA’s interest.  Particularly egregious is the absence of a “fiduciary out” provision that would allow the Government Parties to terminate the RSA if they determine it is detrimental to PREPA.
  • The record shows that the Government Parties failed to exercise due care in considering and entering into the proposed settlement.  Among other defects, the Government Parties’ deliberations in connection with the proposed settlement lacked meaningful analysis of the key issues.

To read more regarding the Committee’s opposition to the motion filed by PREPA’s bond insurers to have a receiver appointed at PREPA, click here.