Puerto Rico
PREPA Plan Seeks to Spur Settlement of Bond Claims With Separate Classes for Settlers and Those Betting on Litigation to Vindicate Rights
Fri 12/16/2022 22:49 PM
Relevant Documents:
Disclosure Statement
Plan of Adjustment
Press Release
DS Approval Motion
Urgent Motion
Motion to Inform
The PROMESA oversight board filed a plan of adjustment for the Puerto Rico Electric Power Authority, or PREPA, debtor this evening, after taking the public corporation into Title III bankruptcy in July 2017 and experiencing the termination of multiple restructuring support agreements.
Tonight’s filing capped several extensions of the court-ordered plan filing deadline, the latest of which was sought by the oversight board earlier this week to facilitate ongoing mediation and to allow for the evaluation of newly produced documents. The confidential material was a central issue during a Dec. 14 omnibus hearing in the Title III court that was marked by discord between the oversight board, mediation team and PREPA bondholders over data and document production matters.
The oversight board developed the plan of adjustment pursuant to Judge Laura Taylor Swain’s insistence that a PREPA plan be on file by Dec. 1, notwithstanding creditor infighting and litigation. The judge ordered the oversight board to move forward on both fronts, ultimately submitting a plan premised on the various outcomes of the litigation underlying the restructuring. Broadly, the forms of consideration under the plan consist of: (i) monies deposited in the sinking fund, as defined in the bond trust agreement; (ii) up to approximately $5.4 billion in New Bonds to be issued on the effective date; (iii) the contingent value instruments, or CVI, to be issued on the effective date in the notional amount of the sum of the GUC CVI, settling CVI, and non-settling CVI; (iv) the avoidance action proceeds, consisting of the net cash consideration received by PREPA in connection with the avoidance actions; and (v) cash flow as budgeted annually solely for payments to the PREPA employee retirement system on account of the pension claim.
At the outset of the filing, the oversight board reveals that the disclosure statement and the economic and financial information provided have not been approved by the commonwealth’s fiscal agent, the Puerto Rico Fiscal Agent and Financial Advisory Authority, or AAFAF, or the official committee of unsecured creditors.
The oversight board is targeting a disclosure statement hearing on Feb. 28, 2023 at 8:30 a.m. ET, with objections due Feb. 10.
Treatment of Claims and Interests
The oversight board touts having support from two impaired accepting classes as a result of settlements with the fuel line lenders and Vitol Inc. Further, the oversight board revealed today that it has reached an agreement in principle with monoline insurer National. Once the agreement is documented, the oversight board will file an amended plan, according to an informative motion. A chart of classification of claims and their impairment/voting status is below.
The fuel line lenders entered into a restructuring support agreement that would satisfy their claims against PREPA and settle the litigation over the priority of their claims against other PREPA creditors. Under the agreement, the fuel line lenders would receive new Series A bonds in an amount equal to 84%of their prepetition claim, with the potential for additional upside if the oversight board prevails in the lien challenge litigation against holders of PREPA’s revenue bonds.. The 84% base return to the fuel line claims reflects several factors, according to the DS, including a settlement of their asserted seniority over the bond claims “on the ground the documents governing the bond claims provides for payment of current expenses such as fuel costs before any net revenues are transferred to pay debt service on the Bonds.”
The second impaired, accepting class is for Vitol’s claim, with the parties agreeing that its approximately $41 million allowed claim would receive 50% of the treatment provided to certain other general unsecured claims.
According to the disclosure statement, the plan undertakes to encourage settlement of bond claims by its inclusion of two separate classes for bond claims - one for bondholders and monoline insurers desiring to settle on the plan terms, and one for bondholders desiring to vindicate their purported rights through litigation.
Bondholders/Monolines
Bondholders and monoline insurers who choose to settle their claims would receive fixed and two distinct types of outcome dependent contingent payments. Their fixed payment would be Series B bonds in the face amount of 50% of their allowable petition date claims. In contrast, if the oversight board prevails on the lien and recourse counts in the amended lien challenge, the non-settling bondholders would receive only their pro rata share of amounts deposited in the sinking fund. Settling bondholders, on the other hand, would receive additional Series B bonds as the first type of contingent payment.
In this scenario, settling bondholders could receive up to 100% of their prepetition claim in Series B bonds otherwise payable to the non-settling bondholders. Conversely, the more bondholders that settle reduces the amount of bonds not settled and that reduces the amount of Series B bonds otherwise payable to the non-settling bondholders. Therefore, as more bonds settle, the additional Series B bonds available to the settling bondholders on a contingent basis tapers down to zero, according to the disclosure statement.
Settling bondholders will also receive a second type of contingent payment, the CVI, for the remaining part of their claim, after distributions of Series B bonds.
Stating that many bondholders did not participate in the mediation, and have not had the opportunity to settle, the oversight board intends to send a settlement offer with a restructuring support agreement containing such terms to all bondholders on or around Dec. 28, with responses to the settlement offer due by Feb. 15, 2023.
PREPA Pensioners
The plan contemplates that participants in PREPA’s pension system, known as SREAEE, would receive the same treatment provided to other pensioners throughout the commonwealth’s confirmed plan of adjustment. As such, PREPA’s defined benefit pension system would be frozen on the effective date, and cost of living adjustments, or COLAs, would be eliminated. PREPA would deposit monies in a PREPA PayGo trust sufficient to pay retirees all pension benefits they would have earned as of the effective date, on account of accrued pensions, in the ordinary course rather than funding a trust corpus for investment.
Moreover, if the oversight board prevails on the lien and recourse counts in the bond litigation, the PREPA PayGo trust would receive 20% of the Series B bonds that remain, if any, after accounting for initial distributions to the settling bondholders, non-settling bondholders, and holders of general unsecured claims. If Series B bonds remain after settling bondholders, fuel line lenders, and general unsecured claimholders are paid in full, then such excess bonds will either be deemed as not issued by PREPA or would go to the PREPA PayGo trust.
General Unsecured Creditors
Finally, general unsecured claimholders would receive “a share” of the Series B Bonds that remain after accounting for distributions to the settling bondholders and non-settling bondholders, providing them an opportunity to recover in full or substantially in full if the oversight board prevails on the lien scope and recourse counts of the lien challenge (depending on the size of the unsecured claim pool and the proportion of settling bondholders).
In this scenario, based on the oversight board’s estimate of the allowable aggregate amount of general unsecured claims, the oversight board believes those claims will be paid approximately 13.09% to 100% of their claims, depending on the proportion of bondholders that choose to settle. If the non-settling bondholders prevail on the lien challenge, however, holders of general unsecured claims will receive very small distributions because nearly all the available monies will have been determined to be encumbered by the non-settling bondholders’ security interest.
Recoveries by Claim and Interest
The disclosure statement provides a chart of approximate recoveries by classification of claim and interest:
The disclosure statement also provides illustrative scenarios of recoveries to certain classes of claims depending upon the outcome of the bondholder litigation. The chart also illustrates the number of excess New Bonds that may remain after all allowable claims have been paid in full. At Reorganized PREPA’s discretion, such bonds either would be deemed to have not been issued by Reorganized PREPA, or would be issued and distributed to the PREPA PayGo Trust.
Funding for New Bonds
To fund the new bonds issued under the plan, a “temporary, hybrid transition charge,” or legacy charge, will be added to PREPA’s rates for a 35 year period. Based on electricity demand projections pursuant to PREPA’s fiscal plan, the legacy charge is expected to generate approximately $5.4 billion dollars of revenue over the next 35 years, providing for the revenues anticipated to be needed to fully repay the new bonds being issued under the plan.
The legacy charge is anticipated to be removed after 35 years, when the new bonds have been paid in full and the CVI has matured or no longer remain outstanding. If electricity demand exceeds projections in PREPA’s fiscal plan, and the new bonds are repaid earlier than 35 years, the legacy charge will remain in place during that time and net revenues up to the amount of the legacy charge will be used to fund CVI distributed to claimholders under the plan. However, if actual demand is lower than the current 2022 fiscal plan projections, the legacy charge will remain in place until the later of (a) full payment of the Series B bonds and (b) the maturity of the CVI.
The DS states that because PREPA’s current rates, “despite being among the highest North America, are insufficient to fund legacy debt service and PREPA’s operating expenses,” the legacy charge will be included in PREPA’s rates to allow for sufficient net revenues to provide a source of repayment for the new bonds.
Revenues from the volumetric component of the legacy charge are projected to decrease with time as demand for electricity decreases on the island.
The quantification of the legacy charge added to a given customer’s bill will be determined considering factors such as a customer’s rate class. For example, the most vulnerable customers (e.g., subsidized residential customers) are not intended to be assessed any connection charge and would only be assessed a volumetric charge if their consumption exceeds approximately 500 kWh per month. Other customer accounts (e.g., general residential customers and commercial and industrial customers) would be subject to a connection charge, a volumetric charge for consumption up to approximately 500 kWh, and an equivalent or higher volumetric charge for consumption over approximately 500 kWh.
Disclosure Statement
Plan of Adjustment
Press Release
DS Approval Motion
Urgent Motion
Motion to Inform
The PROMESA oversight board filed a plan of adjustment for the Puerto Rico Electric Power Authority, or PREPA, debtor this evening, after taking the public corporation into Title III bankruptcy in July 2017 and experiencing the termination of multiple restructuring support agreements.
Tonight’s filing capped several extensions of the court-ordered plan filing deadline, the latest of which was sought by the oversight board earlier this week to facilitate ongoing mediation and to allow for the evaluation of newly produced documents. The confidential material was a central issue during a Dec. 14 omnibus hearing in the Title III court that was marked by discord between the oversight board, mediation team and PREPA bondholders over data and document production matters.
The oversight board developed the plan of adjustment pursuant to Judge Laura Taylor Swain’s insistence that a PREPA plan be on file by Dec. 1, notwithstanding creditor infighting and litigation. The judge ordered the oversight board to move forward on both fronts, ultimately submitting a plan premised on the various outcomes of the litigation underlying the restructuring. Broadly, the forms of consideration under the plan consist of: (i) monies deposited in the sinking fund, as defined in the bond trust agreement; (ii) up to approximately $5.4 billion in New Bonds to be issued on the effective date; (iii) the contingent value instruments, or CVI, to be issued on the effective date in the notional amount of the sum of the GUC CVI, settling CVI, and non-settling CVI; (iv) the avoidance action proceeds, consisting of the net cash consideration received by PREPA in connection with the avoidance actions; and (v) cash flow as budgeted annually solely for payments to the PREPA employee retirement system on account of the pension claim.
At the outset of the filing, the oversight board reveals that the disclosure statement and the economic and financial information provided have not been approved by the commonwealth’s fiscal agent, the Puerto Rico Fiscal Agent and Financial Advisory Authority, or AAFAF, or the official committee of unsecured creditors.
The oversight board is targeting a disclosure statement hearing on Feb. 28, 2023 at 8:30 a.m. ET, with objections due Feb. 10.
Treatment of Claims and Interests
The oversight board touts having support from two impaired accepting classes as a result of settlements with the fuel line lenders and Vitol Inc. Further, the oversight board revealed today that it has reached an agreement in principle with monoline insurer National. Once the agreement is documented, the oversight board will file an amended plan, according to an informative motion. A chart of classification of claims and their impairment/voting status is below.
The fuel line lenders entered into a restructuring support agreement that would satisfy their claims against PREPA and settle the litigation over the priority of their claims against other PREPA creditors. Under the agreement, the fuel line lenders would receive new Series A bonds in an amount equal to 84%of their prepetition claim, with the potential for additional upside if the oversight board prevails in the lien challenge litigation against holders of PREPA’s revenue bonds.. The 84% base return to the fuel line claims reflects several factors, according to the DS, including a settlement of their asserted seniority over the bond claims “on the ground the documents governing the bond claims provides for payment of current expenses such as fuel costs before any net revenues are transferred to pay debt service on the Bonds.”
The second impaired, accepting class is for Vitol’s claim, with the parties agreeing that its approximately $41 million allowed claim would receive 50% of the treatment provided to certain other general unsecured claims.
According to the disclosure statement, the plan undertakes to encourage settlement of bond claims by its inclusion of two separate classes for bond claims - one for bondholders and monoline insurers desiring to settle on the plan terms, and one for bondholders desiring to vindicate their purported rights through litigation.
Bondholders/Monolines
Bondholders and monoline insurers who choose to settle their claims would receive fixed and two distinct types of outcome dependent contingent payments. Their fixed payment would be Series B bonds in the face amount of 50% of their allowable petition date claims. In contrast, if the oversight board prevails on the lien and recourse counts in the amended lien challenge, the non-settling bondholders would receive only their pro rata share of amounts deposited in the sinking fund. Settling bondholders, on the other hand, would receive additional Series B bonds as the first type of contingent payment.
In this scenario, settling bondholders could receive up to 100% of their prepetition claim in Series B bonds otherwise payable to the non-settling bondholders. Conversely, the more bondholders that settle reduces the amount of bonds not settled and that reduces the amount of Series B bonds otherwise payable to the non-settling bondholders. Therefore, as more bonds settle, the additional Series B bonds available to the settling bondholders on a contingent basis tapers down to zero, according to the disclosure statement.
Settling bondholders will also receive a second type of contingent payment, the CVI, for the remaining part of their claim, after distributions of Series B bonds.
Stating that many bondholders did not participate in the mediation, and have not had the opportunity to settle, the oversight board intends to send a settlement offer with a restructuring support agreement containing such terms to all bondholders on or around Dec. 28, with responses to the settlement offer due by Feb. 15, 2023.
PREPA Pensioners
The plan contemplates that participants in PREPA’s pension system, known as SREAEE, would receive the same treatment provided to other pensioners throughout the commonwealth’s confirmed plan of adjustment. As such, PREPA’s defined benefit pension system would be frozen on the effective date, and cost of living adjustments, or COLAs, would be eliminated. PREPA would deposit monies in a PREPA PayGo trust sufficient to pay retirees all pension benefits they would have earned as of the effective date, on account of accrued pensions, in the ordinary course rather than funding a trust corpus for investment.
Moreover, if the oversight board prevails on the lien and recourse counts in the bond litigation, the PREPA PayGo trust would receive 20% of the Series B bonds that remain, if any, after accounting for initial distributions to the settling bondholders, non-settling bondholders, and holders of general unsecured claims. If Series B bonds remain after settling bondholders, fuel line lenders, and general unsecured claimholders are paid in full, then such excess bonds will either be deemed as not issued by PREPA or would go to the PREPA PayGo trust.
General Unsecured Creditors
Finally, general unsecured claimholders would receive “a share” of the Series B Bonds that remain after accounting for distributions to the settling bondholders and non-settling bondholders, providing them an opportunity to recover in full or substantially in full if the oversight board prevails on the lien scope and recourse counts of the lien challenge (depending on the size of the unsecured claim pool and the proportion of settling bondholders).
In this scenario, based on the oversight board’s estimate of the allowable aggregate amount of general unsecured claims, the oversight board believes those claims will be paid approximately 13.09% to 100% of their claims, depending on the proportion of bondholders that choose to settle. If the non-settling bondholders prevail on the lien challenge, however, holders of general unsecured claims will receive very small distributions because nearly all the available monies will have been determined to be encumbered by the non-settling bondholders’ security interest.
Recoveries by Claim and Interest
The disclosure statement provides a chart of approximate recoveries by classification of claim and interest:
The disclosure statement also provides illustrative scenarios of recoveries to certain classes of claims depending upon the outcome of the bondholder litigation. The chart also illustrates the number of excess New Bonds that may remain after all allowable claims have been paid in full. At Reorganized PREPA’s discretion, such bonds either would be deemed to have not been issued by Reorganized PREPA, or would be issued and distributed to the PREPA PayGo Trust.
Funding for New Bonds
To fund the new bonds issued under the plan, a “temporary, hybrid transition charge,” or legacy charge, will be added to PREPA’s rates for a 35 year period. Based on electricity demand projections pursuant to PREPA’s fiscal plan, the legacy charge is expected to generate approximately $5.4 billion dollars of revenue over the next 35 years, providing for the revenues anticipated to be needed to fully repay the new bonds being issued under the plan.
The legacy charge is anticipated to be removed after 35 years, when the new bonds have been paid in full and the CVI has matured or no longer remain outstanding. If electricity demand exceeds projections in PREPA’s fiscal plan, and the new bonds are repaid earlier than 35 years, the legacy charge will remain in place during that time and net revenues up to the amount of the legacy charge will be used to fund CVI distributed to claimholders under the plan. However, if actual demand is lower than the current 2022 fiscal plan projections, the legacy charge will remain in place until the later of (a) full payment of the Series B bonds and (b) the maturity of the CVI.
The DS states that because PREPA’s current rates, “despite being among the highest North America, are insufficient to fund legacy debt service and PREPA’s operating expenses,” the legacy charge will be included in PREPA’s rates to allow for sufficient net revenues to provide a source of repayment for the new bonds.
Revenues from the volumetric component of the legacy charge are projected to decrease with time as demand for electricity decreases on the island.
The quantification of the legacy charge added to a given customer’s bill will be determined considering factors such as a customer’s rate class. For example, the most vulnerable customers (e.g., subsidized residential customers) are not intended to be assessed any connection charge and would only be assessed a volumetric charge if their consumption exceeds approximately 500 kWh per month. Other customer accounts (e.g., general residential customers and commercial and industrial customers) would be subject to a connection charge, a volumetric charge for consumption up to approximately 500 kWh, and an equivalent or higher volumetric charge for consumption over approximately 500 kWh.
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