PREPA bond parties say no lien rehearing needed

Bonds

Puerto Rico Electric Power Authority bond parties asked the U.S. Court of Appeals for the First Circuit Monday to reject the Oversight Board’s request to rehear the court’s June decision that bondholders have a lien on the authority’s net revenues.

While the board’s request delays the bankruptcy, it “has the positive effect of clarifying, in case law again, that municipal revenue bonds are secured by post-petition revenues,” said Cate Long, principal of Puerto Rico Clearinghouse. “In my opinion it’s highly unlikely that the circuit would agree to a rehearing or reverse itself.”

She noted, if this request is rejected, the board can petition the U.S. Supreme Court, “but they are unlikely to take up the issue either.”

The Puerto Rico Electric Power Authority bond parties argued the cases the Oversight Board cited do not support its arguments.

The board, Fiscal Agency and Financial Advisory Authority, and Unsecured Creditors Committee asked the judges who wrote the decision to reconsider in late June and hold a new hearing themselves or with the full court. Friday was the deadline for other parties to respond .

In its filing, Assured Guaranty said the bond trust agreement pledged not just “money received” but also revenues not yet collected and income derived.

The board is disputing what constitutes an “account,” Assured said. “An undisputed security interest in the right to be paid money generated from future energy sales matches the Uniform Commercial Code’s definition of an ‘account’ perfectly — as the [judges’] decision recognized,” Assured said.

While the board said it wasn’t given an opportunity to argue about “accounts” before the court, the board responded to the Ad Hoc Group of PREPA Bondholders’ arguments on this topic, Assured said.

Cases the board cited to support its position, Assured said, either disappear under scrutiny or support the bondholders.

Finally, it is unnecessary for the judges to clarify their finding the authority’s pledge of revenues was subordinated to its “reasonable and necessary post-petition operating expenses,” as the Unsecured Creditors Committee’s requested, Assured said.

Golden Tree Asset Management and Syncora Guarantee said Puerto Rico’s version of the Uniform Commercial Code defines “account” as a “right to payment of a monetary obligation … for energy provided or to be provided.” The judges recognized net revenues as an account and said that perfection of a lien on the account had to be done through filing a financing statement, which the trustee filed on time, Golden Tree and Syncora said.

While the board focuses on the words “money received” in the trust agreement as what the bondholders have a lien on, the words appear in a wider phrase that indicates the bondholders also have a lien on future revenues, Golden Tree and Syncora said. Also, past bankruptcy cases say “money received” can also refer to future income.

The board said the PREPA bondholders’ collateral are not accounts, according to the PREPA Ad Hoc Group. However, the cases the board cited contradict its argument, they said.

Bond trustee U.S. Bank, N.A. said it agreed with the filings from the three bond parties.

The board told The Bond Buyer, “The Oversight Board believes the First Circuit overlooked that the trust agreement restricts revenues to money received, and security interests in money and bank accounts can only be perfected by control. The bonds do not control PREPA’s bank accounts. The bondholders have raised no argument showing the motion for reconsideration should not be granted. On August 9, 2024, the Oversight Board will file its reply explaining why the bondholders’ responses are not meritorious.”

The Unsecured Creditors Committee and FAFAA didn’t immediately respond to a request for a comment.