Ruling against PREPA bondholders may hold positives for them

An appeals court ruling against Puerto Rico Electric Power Authority bondholders may hold positives for them, analysts say.

The United States Court of Appeals for the First Circuit panel of three judges on Monday rejected GoldenTree Asset Management and Syncora Guarantee’s motion to lift the bankruptcy’s stay, which would have allowed the bondholders to appoint a receiver for PREPA.

The panel said Judge Laura Taylor Swain’s final ruling in the lien and recourse adversary proceeding in late November “could open the door to a prompt ruling on a renewed (or entirely new) motion for relief from the automatic stay. Nothing in this opinion precludes the bondholders from pressing such a motion.”

GoldenTree and Syncora own about $1 billion of the $8.2 billion of PREPA bonds outstanding.

The Puerto Rico Oversight Board was the defendant-appellee and the Puerto Rico Fiscal Agency and Financial Advisory Authority was an interested party and appellee. 

In August the bond parties asked the District Court of Puerto Rico to lift the stay. Swain rejected the motion, saying it was largely duplicative of a previous bondholder motion.

The bond parties appealed to the First Circuit, saying Swain had rejected their motion without first holding a hearing, as bankruptcy law requires.

“We hold that the bondholders waived their right to prompt notice and hearing on that motion for relief,” the appeals court judges wrote. “This is because the bondholders accepted a litigation schedule that postponed any hearing on their request for leave to seek appointment of a receiver until after a parallel proceeding about whether — and to what extent — the bondholders had any collateral to protect in the first place.”

Swain did not fully resolve the latter issues until late November and so the bondholders’ August filing to lift the stay was premature, the appeals court judges said.

The Official Committee of Unsecured Creditors argued in the appeals court case bankruptcy law — allowing petitions to lift the stay — is only relevant for secured creditors and the bondholders weren’t secured. The appeals court judges rejected this, saying the bondholders were secured “at least” by liens on money deposited to the sinking and subordinate funds.

“The most important takeaway is that since Judge Swain rule[d] bondholders are secured creditors, the Circuit recognizes they can seek a new lift stay motion,” said Puerto Rico Attorney John Mudd. “This could potentially open a new can of worms and potentially disrupt the confirmation of the plan [of adjustment].”

“GoldenTree’s PREPA lift stay appeal was a success in that it got the essential lien issues in front of the appeals court without having to argue whether the bonds are secured by all of PREPA’s revenues,” said Puerto Rico Clearinghouse Principal Cate Long. “Notably Judge [William J.] Kayatta, who wrote the opinion, appeared to encourage bondholders to file another lift stay motion to address their rights to appoint a receiver and raise rates.”

“The First Circuit Court of Appeals rejected PREPA bondholders’ latest attempt to short-circuit the Title III process,” said Feldesman Leifer LLP Senior Counsel Phillip Escoriaza. ”This time around, again, bondholders ultimately sought a ruling to lift the bankruptcy stay in hopes a receiver would be appointed to take over PREPA who, they hoped, would cause the utility to raise its electric rates, collect more revenue and apportion the money to them.

“The ruling is essentially procedural and bondholders may have opportunity to make fresh attempts at additional bites of the proverbial apple,” Escoriaza said.

Joining Kayatta on the appeals court decision were Ojetta Rogerie Thompson and Julie Rikelman.

The Puerto Rico Oversight Board declined to comment on the ruling. GoldenTree did not immediately respond to a request for a comment.

The First Circuit plans to holds a hearing Monday on a bondholder argument they have a much wider lien than Swain believes.