Friday, July 19, 2019

Judge Swain questions reasonableness of Puerto Rico utility’s $8.5 billion restructuring support agreement

By on June 13, 2019

The U.S. Court for the District of Puerto Rico in San Juan (CB file photo)

Some 1,500 creditors, government vendors to be summonsed by Sept. 1

SAN JUAN — In holding up the Puerto Rico Electric Power Authority (Prepa) debt-restructuring deal, Judge Laura Taylor Swain is looking to avoid a repeat of the debt adjustment plan of the Puerto Rico Sales & Use Tax Corp. (Cofina by its Spanish acronym), of which numerous retail bondholders complained they had not participated in negotiations or were shortchanged.

The federal judge raised doubts about the adequacy and reasonableness of the debt agreement reached between the public power company and its creditors to restructure the utility’s $8.5 billion debt.

Judge Swain made her remarks during an omnibus hearing Wednesday as parties were about to hold a pretrial conference on the status of a motion for a Section 9019 request to move forward the settlements embodied in the restructuring support agreement (RSA) in preparation for arguments to be heard July 24.

Judge Swain said that while reviewing a request by the Unsecured Creditors Committee, which is seeking discovery of information on the adequacy of the agreement, she noticed that Puerto Rico’s Financial Oversight and Management Board board had not filed a required initial declaration on the proposed RSA.

“Therefore, I have concluded, subject to hearing responses from proposals of parties present today, that I would direct the government parties to file their opening factual declarations and supplemental memoranda of law key to those declarations by the middle of next week,” the judge said.

The papers must provide detailed information and arguments sufficient to show the government’s entitlement to the release sought in the 9019 motion, she said.

“For the avoidance of doubt, the additional submissions must include what relief the court is being asked to approve, the legal authorities of such relief and the facts as opposed to conclusory assertions, that would justify granting that relief,” she specified.

Judge Swain said the government needed a “record sufficient to establish the benchmark range of reasonableness for consensual recovery on the bondholders claim in order to determine whether the discount to the claims as a result of the settlement in the RSA falls within the range of reasonableness.”

She also said the government parties had relied on supporting the RSA mostly on the fact that it is a deal struck by parties that were at odds.

“While that would indicate reasonableness…I think that the scope and complexity of the deal demands significantly more to demonstrate that the deal reached by the parties is fair and equitable,” she said, while further requesting information on legislation that would be needed to execute the agreement.

Judge Swain could have reason to question the adequacy of the RSA. The Unsecured Creditors Committee (UCC), for instance, noted in a motion that the deal would eventually lead to the transfer of more than $20 billion over a period of 47 years to Prepa’s secured bondholders, and all but dictate the material terms on any future plan of adjustment in this Title III case under the Puerto Rico Oversight, Management and Economic Stability Act (Promesa).

The UCC says the RSA appears to commit all of Prepa’s economic capacity to satisfying bondholder claims.

“In this way, the RSA appears to render impossible any alternative plan of adjustment and forecloses other resolutions confronting Prepa’s myriad of problems. In light of the magnitude of the proposed settlement and practical finality of the relief the Rule 9019 motion seeks, a full, in-depth evaluation of the facts and circumstances surrounding the settlement is critical. The settlement also requires heightened scrutiny because it is far from clear that bondholders are entitled to any recovery from Prepa, much less the nearly full recovery they stand to receive,” the UCC said.

The RSA calls for a bond exchange on two different tranches of bonds that will be paid through a transition charge to utility customers that will start at 1 cent in July and increase over time to pay the new bonds.

The Irrigation & Electrical Workers Union (Utier by its Spanish acronym) also objected the agreement, contending that it would alter the priorities and interests of the utility’s workers. The agreement is also opposed by the Institute of Competitiveness and Economic Sustainability.

Judge Swain is avoiding what happened during negotiations with the Cofina deal, for which retail bondholders complained they were kept in the dark and unable to participate in the negotiations that left them with little recovery of their investment.

Because of Judge Swain’s move, U.S. District Court Magistrate Judge Judith Dein, who also participated in the process, canceled a Friday hearing in Massachusetts on discovery disputes over the utility’s RSA.

Prepa fuel-line lenders, one of the main groups seeking discovery to determine the adequacy of the RSA, scheduled to take part at the canceled hearing.

Namely, Cortland Capital Market Services LLC, an administrative agent for the utility’s fuel-line lenders under a credit agreement with Scotiabank, in which about $550 million remains outstanding; and Solus Alternative Asset Management and Scotiabank, with which Prepa entered into a $250 million “Trade Finance Facility Agreement,” of which some $146 million in principal is outstanding.

The lenders are trying to push the island’s fiscal oversight board and Fiscal Agency & Financial Advisory Authority (Aafaf by its Spanish acronym) to produce documents and respond to interrogatories in connection to the RSA.

The fuel-line lenders, which provided $700 million in working capital to Prepa so the utility could purchase the fuel it needed to operate, noted that they relied on Prepa’s word that they would be paid before the bondholders.

“The legal priority of the fuel lines was enshrined in numerous documents, including credit agreements, government resolutions and the offering documents for the bonds themselves, which confirmed to bondholders that their debt would be subordinate to the fuel lines,” they said.

Earlier during the hearing, the fiscal board’s lead counsel, Martin Bienenstock, revealed that bond insurer Syncora Guarantee was slated to join the RSA but it was not immediately clear if the inclusion of Syncora would significantly increase the percentage of bondholders joining the agreement, which is currently supported by 40% of all utility bondholders and by 51% of the uninsured bondholders.

Bienenstock also announced that the board may propose a debt adjustment plan for the commonwealth in 30 days.

“That is our hope,” he replied to Caribbean Business when asked to elaborate and whether it included general obligation bonds. It should be “everything,” he simply said.

In offering a status summary to the court, Bienenstock highlighted the agreement reached between the Official Committee of Retirees and the board, which would exempt pensions below $1,200 a month from cuts but would cut others by 8.5%. Agreements related to pensions have also been reached with the Teachers Association and the United Public Servants.

Peter Friedman, a lawyer for Aafaf, insisted the government opposes any cuts to pensions as well as agreements with unions.

Judge Swain declined a request by certain bondholders of the Employees Retirement System, known as PR Funds, to vacate the Unsecured Creditors Committee or change the composition of the committee, saying she had no jurisdiction to do so because that was the job of the U.S. Trustee. PR Funds said the UCC was conflicted because it had retired employees as well as unsecured commonwealth creditors as members.

1,500 summonses

Also during Wednesday’s hearing, Judge Dein agreed in part to a request by the UCC and the board for a stay on the adversary proceedings filed against 1,500 creditors and government vendors but said they had to be served summonses by Sept. 1. UCC lawyer Luc Despins highlighted the enormity of the task of dealing with such a large number of litigants.

Judge Swain took under advisement a request by the Puerto Rican Judicial Association, which seeks a ruling preventing the government from cutting judges’ pensions. The association’s lawyer David Indiano said the board did not have the authority to alter the republican form of government that calls for the separation of the three branches of government and that cutting the pensions would violate judicial independence.

Bienenstock, however, said it would be a violation of due process because other creditors are alleging that they have a priority in payments. He said judges wanted to get a separate ruling that would protect their pensions at the expense of other creditors.

“They want a district court to hold that the Oversight Board cannot certify a fiscal plan that impacts their pensions…. There are many parties in interest who assert priorities in different grounds. Everyone else in this case who has tried that has been turned down,” Bienenstock said.

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