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Court rules against Puerto Rico’s power utility creditors, impedes receivership

By on September 14, 2017

SAN JUAN — Federal Judge Laura Taylor Swain denied Thursday a request by several creditor groups of the Puerto Rico Electric Power Authority (Prepa) that sought relief from the bankruptcy stay to commence a lawsuit against the public corporation to put it under receivership.

The Ad Hoc Group of Prepa Bondholders and insurers National Public Finance Guarantee Corp., Assured Guaranty Corp. and Syncora Guarantee Inc., which together hold $5.3 billion, or 65%, of the utility’s debt, intended to put Prepa under receivership in order to ensure rates could be raised so the public corporation could pay its debt.

In her decision, Judge Swain pointed to “the impact of the stay and the balance of harms,” as well as several sections of the federal Promesa law that prevent receivership without the island’s financial control board’s consent. She had previously heard arguments on the creditors’ request during a hearing held Aug. 8.

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Counsel for the creditors argued that Prepa bonds were secured by “a lien” on the utility’s revenues, “a covenant” that rates would be sufficient to cover its debt service obligations and “a right” to seek the appointment of a receives upon a default event.

On July 2, Prepa commenced its bankruptcy process under Title III of Promesa, after a restructuring agreement with creditors was terminated. The utility defaulted on July 3.

Both Prepa and the fiscal board argued that a near-term rate increase will harm Puerto Rico’s prospects for economic recovery. The board further stated that an increase in electricity prices beyond 21.4 cents per kilowatt-hour will result in Puerto Rico not becoming fiscally sustainable.

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For their part, the Prepa creditors contended that the reasons for the utility’s financial crisis include “mismanagement and political domination” of its staff and governing board, Gov. Ricardo Rosselló’s decision to rescind the contract of Chief Restructuring Officer Lisa Donahue, and the board’s decision to turn down the restructuring agreement between Prepa and its creditors.

Judge Swain also considered the impact of Sections 305 and 306 of Promesa, noting that they impose certain limitations to the court’s powers, although all property of the debtor is under the jurisdiction of the court.

“It is clear that Section 305 prohibits this Title III court from transferring control of Prepa’s management and property to a receiver without the Oversight Board’s consent,” the decision reads.

The judge further stated that Promesa “protects the authority of the people’s elected officials and their appointees to direct the restructuring” process under Title III.

“Creditors may engage with the governmental debtor in that process, and may be heard in opposition to actions they contend are inconsistent with the requirements of law, but they cannot, through invocation of the Court’s powers, wrest control of governmental functions, revenues or property, from the governmental debtor,” she added in her denial to the Prepa creditors’ action that was filed on July 18.

-Luis J. Valentín contributed to this story.

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