PREPA Bondholder Claim Rejected, Restructuring Continues

A U.S. District Court judge has rejected a $3.7 billion administrative expense claim filed by bondholders of the Puerto Rico Electric Power Authority (PREPA), a decision that removes a significant hurdle in the ongoing debt restructuring process. Although the claim was denied, approximately $8.48 billion in pre-bankruptcy principal and unpaid interest remains in contention.

Judge Swain’s Ruling

U.S. District Judge Laura Taylor Swain ruled against the bondholder group – which includes Assured Guaranty, GoldenTree Asset Management, Syncora, National Public Finance Guarantee, and U.S. Bank as trustee – stating they did not demonstrate a legal basis for receiving administrative priority status. Administrative expenses are paid ahead of almost all other claims in bankruptcy.

The bondholders argued that PREPA had improperly used “Net Revenues” pledged as collateral under a 1974 Trust Agreement, and that this use should be treated as an administrative expense, ensuring immediate repayment. Judge Swain disagreed, finding that the bondholders failed to meet the requirements of Section 503 of the Bankruptcy Code, which requires demonstrating a post-petition contribution benefiting the estate or debtor. The judge emphasized that the bondholders’ claim stemmed from a pre-bankruptcy contract and lacked any post-petition transactions with PREPA.

Arguments Dismissed

Judge Swain dismissed several arguments presented by the bondholders. These included claims based on the “fundamental fairness” doctrine, the tort of conversion, and the Takings Clause of the Bill of Rights. The court found that the bondholders had not demonstrated malicious intent or a taking of their property, and had contracted away their ability to claim a taking under the terms of the Trust Agreement.

Oversight Board Response

The Puerto Rico Oversight Board welcomed the court’s decision, stating it “removes a significant obstacle to confirmation of” its proposed plan of adjustment. [Oversight Board Statement]

What’s Next?

With the administrative expense claim denied, the focus shifts back to the remaining $8.48 to $8.5 billion in outstanding bonds and unpaid interest. The Oversight Board is currently offering bondholders a recovery of four cents on the dollar, an offer that has been rejected. Negotiations and mediation between bondholders and PREPA representatives have been ongoing for approximately 12 years. Some observers believe a settlement, potentially imposed by Judge Swain, is ultimately necessary to resolve the long-running bankruptcy case. [Bond Buyer]

Puerto Rico-based attorney John Mudd suggests the decision won’t lead to a quick settlement, as both sides remain confident in their positions. Vicente Feliciano, president of Advantage Business Consulting, emphasizes the need for a settlement, either negotiated or imposed by the court, to allow both bondholders and Puerto Ricans to move forward. [Bond Buyer]