Relevant Documents:Response to Plaintiffs’ Opening Briefs (PREPA Bondholders) /
ExhibitsSupplemental Response to BlackRock (PREPA Bond Trustee/Assured) /
DeclarationResponse (Oversight Board) /
DeclarationCorrected Expert Report (Oversight Board) Supplemental Expert Report (Oversight Board) Response (UCC)Reservation of Rights (Fuel Line Lenders) Brief in Response (SREAEE) Brief in Response (UTIER)
The PROMESA oversight board and the PREPA bondholder parties - the ad hoc group of PREPA bondholders, bond trustee U.S. Bank and monoline insurers Assured Guaranty and Syncora Guarantee - remain at odds regarding the bondholders’ asserted unsecured
net revenue claim, according to response briefs from the parties involved in the estimation dispute filed yesterday, Monday, May 24.
Hewing to the positions taken in their
initial briefs, the bondholder parties maintain that their $8.5 billion net revenue claim should be allowed in full, while the oversight board contends that the claim should be estimated “at no more than $2.0 billion.”
Meanwhile, the official committee of unsecured creditors contends that both sides overestimate the bondholders’ unsecured net revenue claim, arguing that they apply an inflated discount rate and that the claim must be further reduced to account for operating costs and other factors that would limit or eliminate net revenue available for satisfaction of the bondholders’ claims.
The briefs also focus on the sharp divide evidenced by the
opening expert reports and the subsequently filed
expert rebuttal reports.
SREAEE, the PREPA employee retirement system, and UTIER, the utility’s main union, also filed responsive briefs, with SREAEE advocating for a claim between $0 and $1.21 billion and UTIER contending the claim should be reduced to $0 and calling the projections underpinning the top end of the oversight board’s claim estimation range “radically optimistic.”
PREPA’s fuel line lenders, the oversight board and the PREPA bondholder parties also addressed payment priority issues raised in the initial round of briefing. In a reservation of rights, the PREPA fuel line lenders stressed their view that the fuel line loans “must be paid in full before the bonds” and pointed out that the instant proceeding is an estimation of the bondholders’ claims and not an adjudication of issues relating to the fuel lenders’ claims or their status.
Both the oversight board and the PREPA bondholder parties took issue with BlackRock Advisors LLC’s position that PREPA’s $375 million in 2016 re-lending bonds have a special priority or recourse, with the bondholder parties warning that BlackRock’s arguments undermine the goal of a consensual resolution and the oversight board arguing that there is no support for BlackRock’s position.
The estimation hearing is
scheduled to begin on June 6 at 9:30 a.m. ET.
PREPA Bondholders’ Response
The PREPA bondholder defendants assert that the oversight board has failed to identify any “reason in law or economics” to limit the amount of the trustee’s and bondholders’ unsecured net revenue claim, restating their position that the claim “should be allowed in full.” The brief argues that the oversight board and its supporters “fundamentally misconceive” the nature of claim estimation and the plain meaning of a “right to payment,” positing that estimation under section 502(c) of the Bankruptcy Code “sets the
amount that a creditor was entitled to seek from the debtor at the outset of the reorganization process, not its likely recovery on that amount.”
The defendants oppose any cap on their equitable remedy due to “collection risk or delay,” characterizing any such cap as a position “that scrambles claim allowance and recovery.”
The brief begins by rejecting the oversight board’s assertion that there are legal limitations on the enforceability of the bondholders’ equitable remedies. The defendants stress that they, along with the trustee, have “powerful remedies” under the trust agreement and Puerto Rico law “to enforce their right to payment for as long as it takes to be paid in full,” adding that “[n]o law imposes any limitation on the enforcement of those rights that reduces the amount of the Trustee’s and Bondholders’ right to payment.”
The bondholder defendants contend bankruptcy law does not govern the amount of the unsecured net revenue claim, rejecting the oversight board’s argument that the bondholders’ and the trustee’s right to payment “would be cut off by confirmation of a plan of adjustment.” The brief characterizes this position as a “frivolous” argument that “ignores that claim allowance and estimation establish the amount of a claim outside of bankruptcy.”
According to the bondholder defendants, their equitable remedies also are not limited by New York or Puerto Rico law, and the oversight board’s “musings about possible political interference are pure speculation and not legitimate considerations in estimating the Bondholders’
equitable entitlement to enforce their right to payment.”
The defendants also contend that there is no authority for the oversight board’s proposed discount of the bondholders’ net revenue claim based on PREPA’s ability to pay or the time value of money. The brief argues first that none of the cases cited by the oversight board justifies discounting the principal of bonds because “the disallowance of post-petition interest on such debt already serves that purpose” and “[f]urther discounting would lead to ridiculous results.”
The defendants reason that, upon default, the trustee and the bondholders “could accelerate the bonds and thus have an immediate right to payment in full that would not be subject to discounting.”
Moreover, argue the defendants, the expert reports for both sides demonstrate that PREPA is capable of paying the bonds in full even taking into account any limitations on PREPA’s ability to repay.
Further, even if the court were to additionally require the principal and future interest payments that PREPA would pay outside of Title III to be discounted to present value, “the conservative analysis of Defendants’ expert, Dr. Maureen Chakraborty, demonstrates that the net present value of that income stream would approximate or exceed the principal and pre-petition interest on the bonds.”
The defendants assert that the oversight board’s expert “comes to a different and bizarrely low result … through a series of patently incorrect assumptions on everything from affordability to expenses to speculative risks identified by counsel,” arguing that their own expert’s “corrections of these errors bring the parties’ valuations largely into alignment - showing, yet again, that the correct allowed amount of the Claim is the full principal amount plus pre-petition interest.”
The brief includes a statement regarding the procedures for the estimation hearing expressing support for direct examination, in addition to cross-examination, of the parties’ expert witnesses instead of the court allowing “only redirect and limited cross examination of experts after any questions by the Court.” The defendants point out that the parties’ experts have submitted “competing calculations of Defendants’ Claim, and those experts’ estimates differ by billions of dollars.” In light of the “inherently complex nature of the material at issue,” the defendants argue that the court “may benefit from having these experts explain their analysis directly to the Court.”
Supplemental Response to BlackRock
Separately, Assured Guaranty, Syncora Guarantee and the PREPA bond trustee filed a supplemental response to BlackRock’s statement relating to the estimation of certain unsecured net revenue claims associated with the 2016 re-lending bonds, warning that BlackRock’s statement “undermines” the goal of achieving a consensual resolution in the PREPA Title III case and that any effort “to discriminate between and among bonds that clearly have the same rights and remedies will only further mire this case in litigation.” BlackRock is a member of the ad hoc group of PREPA bondholders.
The supplemental response asserts that the allowable unsecured claim for the re-lending bonds is the same as for the other bonds and already included in the bond trustee’s overall claim, contending that the repayment terms and proposed recoveries for the re-lending bonds are irrelevant. The parties argue further that the re-lending bonds do not have a “special priority” and have no greater payment rights against PREPA, explaining that there is nothing in the bond purchase agreements related to the re-lending bonds or the trust agreement providing “that the Relending Bonds have any greater rights than PREPA’s other outstanding bonds.”
The parties reject BlackRock’s claim that the re-lending bonds should be treated as “current expenses” under the trust agreement, explaining that the treatment of bond debt as current expenses would be “completely contrary to the role and function of the Current Expenses covenant in the Trust Agreement.” The supplemental response maintains that current expenses “include only qualified current operating expenses as provided in an annual budget, not debt payments,” and states that if BlackRock’s “position on the nature of ‘Current Expenses’ were correct, then presumably all of PREPA’s bonds could be construed as current operating expenses.”
Oversight Board’s Response
The oversight board characterizes the PREPA bondholder defendants’ request for the allowance of their claim in full without estimation as an improper request for reconsideration of the Title III court’s lien challenge opinion. The brief explains that the bondholder defendants “dedicate almost the entirety of their brief to their argument - rejected twice by the Court already - [that] they have a recourse ‘right to payment’ of the full amount of the Bonds, existing forever until they are paid ‘in full.’” The oversight board calls this position “erroneous,” adding that it has already been “foreclosed by the Court’s prior rulings.”
The brief makes several arguments that parallel the points raised in the board’s initial brief in support of estimating the unsecured net revenue claim at no more than $2 billion, including arguments regarding a discount of the claim to present value, the limitations on PREPA rate increases and the legal limits on the enforcement on recovery of judgments.
The brief rejects the bondholders’ argument that estimation is “unnecessary because their claim should be allowed in the full amount of $8.477 billion.” Instead, according to the oversight board, the court’s lien challenge opinion “clearly recognized” that the defendants did not have a claim under section 101(5) of the Bankruptcy Code “for the face amount of the Bonds.”
The brief acknowledges the court’s holding that the defendants hold an equitable claim “by way of specific performance or a receiver under Trust Agreement § 804 to monies available for deposit into the Sinking Fund” and a claim under section 101(5)(B), which “would be a right to payment of the Net Revenues that the exercise of equitable remedies would bring into existence over the period in which those equitable remedies could be enforced.”
The oversight board notes, however, that if specific performance “would not generate Net Revenues, or if the Net Revenues would be limited, then Defendants’ right to payment would be so limited.”
The oversight board also challenges the bondholders’ argument that there should be no limitations on the allowance of their claim, restating its position that the defendants’ legal rights “are in fact limited in various ways, including by statutes of limitation, limits on the rate increases a receiver could charge, and by the fact a receiver would have to pay Current Expenses first.” The brief argues that the defendants are “wrong that if the Bonds remain outstanding until paid in full, that means their recourse right to payment is $8.477 billion.”
In a footnote, the oversight board “reserves for another day its belief that the right to payment from net revenues otherwise subject to deposit into certain funds is not a recourse claim to all PREPA’s assets generally.”
The oversight board’s brief challenges the bondholders’ assertion that a receiver would not be limited to charging “reasonable” rates based on the lack of any cap in the trust agreement or the PREPA Enabling Act, adding that this argument is also contrary to the court’s lien challenge opinion. Specifically, the oversight board points to the language in the PREPA Enabling Act requiring PREPA to set “‘reasonable and just rates, fees, rents, and other charges.’” As a result, the oversight board reasons that the defendants’ contention that “a receiver in PREPA would raise rates without limitation, and that PREB would approve such rates, is untenable and should be rejected.”
The oversight board rejects the argument that “there is no temporal limit on the enforcement of the Bonds” because it “ignores the applicable statute of limitations for the enforcement of judgments which bar further enforcement after 20 years.”
The oversight board also contends that the defendants’ argument against “double discounting” is based on the “erroneous assumption that the Court’s ruling is premised on a recourse claim for principal and interest.” According to the oversight board, although the defendants argue that their stream of net revenue payments “need not be present valued as of the Petition Date” in order to avoid double discounting, meaning that the claim would be discounted “once to eliminate postpetition interest (to which no unsecured creditors are entitled) and once to present value the stream of payments,” the court “rejected the principal and interest claim as a recourse claim” and left the defendants “with a stream of future payments of net revenue” that “must be present valued as of the Petition Date.”
The oversight board is equally critical of the bondholder defendants’ analysis regarding the estimation of the unsecured net revenue claim, calling their conclusions “not credible on their face.” The brief notes that the defendants’ calculation of the net present value of PREPA’s net revenue “almost perfectly adds up to the outstanding principal and interest due on the Bonds as of the Petition Date, regardless of how ‘conservative’ or ‘aggressive’ their assumptions are.”
The implication of this conclusion, according to the oversight board, is that “under any ‘reasonable’ scenario, PREPA was capable on the Petition Date of paying all its bond debt, Current Expenses (including fuel line loans), billions of dollars of pension underfunding, and operating expenses and necessary capital expenditures in full for decades,” indicating that the defendants
“dressed up their analysis to appear fair and conservative, but actually manipulate[d] the model to always hit its preordained conclusion of payment in full” (emphasis added).
The oversight board also criticizes the reports by the defendants’ expert Dr. Maureen Chakraborty, an economist, saying that Chakraborty’s model is “contrived” to always result in a claim of approximately $8.47 billion by, among other things, using an “indefensibly low” discount rate and an “unlimited bond term.” According to the oversight board, Chakraborty also incorrectly “relies on hindsight,” fails to make “necessary adjustments to her data” and “inflates” unsecured net revenue by “double counting cost savings.”
The oversight board maintains that the May 9 Chakraborty report “contains material flaws in its analysis,” citing a
supplemental report by the board’s own expert, David Plastino, which was filed in conjunction with the board’s response. Specifically, the board argues that the amended Chakraborty report purports to follow the 2017 fiscal plan but actually “omits critical expenses while assuming the plan works without them.”
While the Chakraborty report “represents it uses data known or knowable at the Petition Date,” the report “does not do so for key variables.” The board asserts that, among other things, the report “assumes PREPA customers can be charged rates at the affordability breaking point for indefinite periods of time without any adverse effects; inappropriately relies on hindsight without necessary adjustments; applies[] a far lower discount rate for a reorganized debtor based on future knowledge, rather than a discount rate for a receiver operating an insolvent entity without bankruptcy discharge and protection; fails to appropriately discount the claim; [and] double counts cost savings.”
Further, in Chakraborty’s “less ‘conservative’ scenario,” she “inexplicably assumes PREPA could continue to operate and generate Net Revenues with minimal capital expenditures for more than a decade, and without paying valid Current Expenses and other valid claims fully enforceable outside bankruptcy.”
In a footnote, the oversight board addresses the multiple reports prepared by Chakraborty, explaining that her amended report, dated May 9, “materially altered” the original May 5 report’s baseline assumptions “after she was able to review Plaintiffs’ expert report as well as consider remarks at the status hearing held on May 8, 2023.”
The latest Chakraborty, filed on May 22, “dropped the incremental rate increase for residential customers she believed was affordable 40% from 10 c/kWh to 6 c/kWh, but conveniently offset that mistake by altering the ‘term of the Bonds’ from 15-25 years to 25-36 years,” according to the oversight board, which observes that “despite the rate decrease, Defendants’ valuation of the Unsecured Net Revenue Claim remains at or near the $8.4 billion asserted in the Master PREPA Bond Claim in all six of her scenarios.”
A portion of the oversight board’s response also addresses BlackRock’s position regarding the 2016 re-lending bonds, arguing that BlackRock “points to no contractual language that gives the 2016 Relending Bonds greater recourse or security interests than other Bondholders, nor does it suggest any special legal principles apply to relending bonds, either generally or in this particular case.”
Instead, BlackRock relies on “on equitable considerations the law does not recognize,” according to the oversight board, which also contends that the 2016 re-lending bonds “neither constitute DIP financing nor are they protected by a DIP order insulating the 2016 Relending Bonds from challenge or giving other rights or protections.”
The oversight board also filed the
corrected rebuttal expert report from economist Dr. Jurgen Weiss.
UCC’s Response
The UCC argues that the bondholders’ right to payment after the appointment of a hypothetical receiver is subject to estimation and must be discounted to present value. Challenging the bondholders’ assertion that their right to payment arising from the exercise of their equitable remedies is separate from PREPA’s ability to pay, the UCC states that the bondholders’ power to increase funds available for collection on a judgment through the exercise of those rights and remedies “is not unlimited” and points to the court’s prior determination that “any such remedies …
would still be subject to the payment restrictions and priorities of the Trust Agreement.”
Further, because the bondholders’ source of repayment is a stream of revenue over the course of decades, “there is no legitimate basis … to deny that a
present estimate of that
future source of repayment must be discounted,” a “basic economic reality [that is] consistent with New York law (which governs the Trustee’s rights under the Trust Agreement).”
Relying on, among other things, an expert report prepared by Julia Frayer of London Economics International LLC, the UCC contends that both the bondholders and the oversight board overestimate the bondholders’ unsecured net revenue claim. The UCC disputes the 5.05% discount rate proposed by the bondholders’ expert and the 6.5% discount rate proposed by the oversight board’s expert, proposing instead a discount rate range of 8.46% to 16.65% to reflect present value as of July 2, 2017. Assuming a legal collection period of 20 years, the UCC’s proposed discount rate range would result in an unsecured net revenue claim “between $2.2 billion and $5.3 billion” before adjusting for additional factors, according to the response.
The UCC further disputes the bondholders’ estimate of future net revenue on the grounds that it “(i) contains a number of flaws in the size and type of rate increase that a receiver would be able to implement and (ii) fails to account for various operating costs and expenses that would have to be paid by PREPA in order for it to be able to continue generating
any net revenues, much less the implausible level of net revenues posited by the Bondholders.” According to the UCC, the following chart, taken from Frayer’s expert report, reflects “the corresponding reduction in the net revenues available (on a nominal basis) to service PREPA’s Bonds” after correcting for these factors:
Fuel Line Lenders’ Reservation of Rights
Cortland Capital Market Services LLC, as successor administrative agent for fuel line lenders asserting claims in the principal amount of approximately $700 million, rejects the bondholders’ position that the fuel line lenders and their loans, referred to as the “fuel lines,” are “junior to the bonds under the Trust Agreement,” arguing that “there is no question that - prior to the commencement of this Title III case - the Fuel Lines were Current Expenses payable before the bonds” and “even if (contrary to fact) the Fuel Lines claims were not Current Expenses, there is no doubt that they are valid unsecured claims against PREPA with full recourse to PREPA’s gross revenues.” According to Cortland, “[N]o matter their priority status, therefore, the Fuel Lines would still have rights superior to the bonds.”
SREAEE’s Response
The SREAEE agrees with the oversight board’s estimation of the unsecured net revenue claim at $0 by virtue of bankruptcy law. Should the court understand that the correct term for estimation is the 20-year mark provided by the oversight board, SREAEE provides an analysis to modify the oversight board’s $2 billion estimation to a range of $865.1 million to $1.21 billion. SREAEE agrees in principle with the factors considered by the oversight board in its estimation but asserts that the oversight board underestimates the pension expense and argues that the “estimate is unrealistically favorable to the bondholders in most respects.”
In a footnote, SREAEE states that it does not accept that the oversight board has the statutory authority to reform the PREPA pension system under Title III.
UTIER’s Response
UTIER, as PREPA’s largest union is known, agrees with the oversight board’s estimation of $0 recovery for bondholders if the cutoff date were the petition date but asserts that even if the court understands that it goes beyond the petition date, the result is still an unsecured net revenue claim of $0. “In any scenario where PREPA must meet its obligations as a utility before spending a cent on its obligations as a debtor, there is nothing left,” according to UTIER.
UTIER argues that the oversight board brief is “radically optimistic” about the net revenue projections that result in the $2 billion claim, “even if it is considered as of the petition date, and especially if the true events transpired in Puerto Rico since 2017 are considered, which they should.” UTIER contends that the discount rate and the adjustment for contingencies used by the oversight board are too low and too limited. Asserting that “any rate increase is unrealistic at best and impossible at worst,” the union argues that any estimation should exclude rate increases and focus only on the possibility of lowering expenditures.