Bankruptcy Code

LAS OPINIONES Y LA AEE

                                                                        Opinions are like asses, everybody has one”

La Primera Enmienda a la Constitución de los USA entrona el derecho a la libre expresión. Incluida entre ellas está el de la opinión incorrecta. El problema es que los políticos boricuas y sus secuaces llevan este derecho a la exageración. Ejemplo de ello son dos columnas en Metro de Juan Manuel Frontera, Vice-Presidente de Proyecto Dignidad y Jesús Manuel Ortiz del PPD.

El señor Frontera, dice en su columna lo siguiente:

Aquí hay que tener algo claro, los bonistas no ven en la AEE la fuente de repago para su acreencia. Actualmente la AEE son cables, torres, postes y plantas generatrices que no llega ni a cubrir una tercera parte de la deuda. En cualquier proceso de quiebra de cualquier corporación los acreedores cobran de los bienes de la corporación. Si le prestas a una corporación, quien paga es la corporación. No obstante, estos bonistas no les interesa cobrar de los bienes de la AEE, sino que les interesa cobrar de los clientes de la AEE, esto es, los bolsillos de la familia puertorriqueña.

Desgraciadamente, esto lo que demuestra es total ignorancia del Título III de PROMESA y lo que son los bonos de la AEE. Estos bonos, en mi opinión, son non-recourse bonds, lo cual quiere decir que se cobran de la tarifa que pagan los abonados de la AEE. Más aún, la Junta va a litigar un caso para demostrar que esa es la única fuente de repago porque así los bonistas no tendrían control de los haberes de la AEE, la generación, distribución y transmisión. Además, hablar de quiebras en general es incorrecto ya que el Título III está basado en el Capítulo 9 de la ley de Quiebras, que es uno sui generis donde se hace claro que es diferente a los demás capítulos. Por lo tanto, los bonistas no pueden cobrar como quiere el Sr. Frontea. La diferencia mayor, como traté de explicar en Twitter a una Doctora en Historia que me porfiaba el punto, en Capítulo 9 y el Título III, NO HAY LIQUIDACIÓN como el Capítulo 7 de Quiebras. Por lo tanto, las elucubraciones mentales del Sr. Frontera carecen de base en la realidad.

El Representante Jesús Manuel Ortiz, a quien aprecio y distingo, culpa a Pierluisi por la oferta de la Junta en julio de 2022 a los bonistas de $23 por abonado a 35 años. Aparte que esa es la oferta de la Junta y por la secretividad de la mediación no sabemos cual era la posición de AFFAF sobre ello, ¿en serio alguien cree que llegar a un acuerdo con los bonistas, fuel line lenders, el Retiro de la AEE, la Utier y los Acreedores no Asegurados no va a forzar un aumento en la tarifa de electricidad? Llevamos 8 años sin pagar el principal de los bonos de la AEE y 6 años sin pagar un centavo. Obvio que se va a aumentar, la pregunta es cuanto.

El Representante, quien es también abogado de reciente cuño, argumenta que Pierluisi se alía con la Junta el vetar el PC 1383 y que este hubiera resuelto nuestros problemas con la AEE al imponer límites al plan de ajuste. Yo hice una reseña del PC 1383 y detalle porque era contrario a PROMESA y la Junta lo detendría. Ver aquí.  Solo para que se entienda lo risible del PC 1383, imponía un límite de 20 centavos por kilovatio hora, cosa que ni existe en este momento. Como digo frecuentemente, los legisladores piensan que con legislar pueden cambiar la realidad.

El tema de la AEE es uno complicado y en nada abona la “opiniones” que son claramente fuera de la realidad e ignoran los entuertos legales que existen. Antes de hablar y publicar, estudien.

PREPA-WHAT NEXT?

                                                                        May you live in interesting times. Chinese proverb

At 12:02 am of September 17, 2022, with Tropical Storm Fiona about to strike Puerto Rico, the Financial Oversight and Management Board (the Board) filed a motion informing the Title III Court that it believed that the path forward for PREPA was to litigate the bondholders alleged security interests, the allowability of their claims pursuant to section 927 of the Bankruptcy Code and the alleged seniority of the fuel line claims.

I confess I was surprised by the Board’s motion. I was inclined to believe a settlement was in the works. Obviously I was wrong.  This means, irrespective of the manner in which it evolves, there will be years of litigation in the PREPA Title III and beyond. I will attempt to provide a background to this mess.

Around July 1, 2014, PREPA drew $41 million from its debt service reserve and immediately creditors and analysts pondered whether this was a technical default.  https://www.bondbuyer.com/news/prepa-draw-is-a-danger-sign-analysts Subsequently, negotiations between PREPA and its creditors began, and in September of 2014, Liza Donahue was appointed restructuring Officer at PREPA https://www.bondbuyer.com/news/prepa-appoints-turnaround-vet-lisa-donahue-as-chief-restructuring-officer This move was dictated by bondholders. Ms. Donahue continued negotiations with bondholders in September 2015 https://energia.pr.gov/wp-content/uploads/sites/7/2016/07/Ad-Hoc-Group-Press-Release.pdf with a 15% haircut. By this time, however, Congress had already introduced PROMESA and on June 30, 2016, it was signed into law by President Obama. PREPA missed its July 1, 2016 payment pursuant to section 405 of PROMESA. Subsequently, then Disgraced Governor Rosselló renegotiated the deal by April of 2016 https://www.bondbuyer.com/news/puerto-rico-reaches-new-prepa-deal The Board, in a 4-3 vote, however, decided to ignore section 104(i)(3) of PROMESA and filed for Title III protection on July 2, 2016 https://www.nytimes.com/2017/07/02/business/puerto-ricos-electric-power-authority-effectively-files-for-bankruptcy.html

During the Title III proceedings, the bondholders asked Judge Swain to lift the stay for the appointment of a receiver for PREPA. Judge Swain denied the relief, partly claiming section 305 of PROMESA precluded her from doing so. Bondholders appealed and in FOMB v. Ad Hoc Group of PREPA Bondholders, 899 F.3d 13 (1st Cir. 2018) reversed Judge Swain, explaining that she could lift the stay in order to have a different judge determine whether a receiver was to be appointed. The First Circuit also emphasized that the lifting of the stay required a showing that movant had a lien that needed adequate protection and that the Title III Court could also determine the powers of the receiver. This decision will have great importance as we will soon see.

With this reversal, the Board quickly engaged bondholders in negotiations and by May of 2019 had reached a Restructuring Support Agreement with them https://aeepr.com/es-pr/QuienesSomos/Ley17/RSA%20-%20Public%20(May%203rd%202019).pdf As different groups joined this agreement, parts of it were modified, etc. By October of 2019, the Board filed a Bankruptcy Rule 9019 motion for the approval of the RSA. The Board subsequently alleged that it was trying to obtain the Legislature’s approval of laws for the RSA and that this, coupled with earthquakes, the Covid-19 Pandemic, caused the postponements of the 9019 motion. I find it doubtful given the Board’s claims in the Commonwealth plan of adjustment controversies where it claimed it did not need it but that is what it claimed.  

Tellingly, the Unsecured Creditors Committee (UCC) filed several motions claiming that the RSA was dead, and the Board opposed them saying that its attention was in the restructuring of the Commonwealth and negotiating with the Legislature. Every time Judge Swain swept away the UCC’s objections.

Things were coasting along when PREPA bondholders filed a motion pursuant to PROMESA section 312 requesting that the Court appoint a mediation team on February 18, 2022. The Board opposed the motion on February 28, 2022, stating, inter alia, at page 3 of its motion “[h]igher oil prices are now causing higher electricity rates independent of the increased rates imposed by the RSA, and likely by any restructuring. That underscores the need for prudence and evaluation rather than a rush to reach and consummate a deal that serves only one constituency and could prove too costly for PREPA post-emergence.” AAFAF and other stakeholders opposed the motion.

On March 8, 2022, the Governor announced it would withdraw from the RSA and Judge Swain denied the PREPA bondholders’ motion. The Court, however, stated that it would entertain mediation that was economically feasible. It also stated that “[u]ntil recently, the Oversight Board and the government entities’ words and actions gave the Court reason to expect that a plan of adjustment would be forthcoming promptly and that no interruption of the oversight engagement efforts would hinder the process.”

Subsequently, PREPA, the Board, the UCC, Bondholders, Utier (the PREPA union) and the PREPA retirement fund, went to mediation. This mediation was extended several times, over the objection of the UCC, the Utier and PREPA’s retirement fund, who preferred to litigate different issues of bondholders’ rights.

When the decision by the Board was announced, Justin Peterson, a member of the Board, took to tweeter to express his disappointment on the Board’s decision. He also said that “rolling the dice on litigation instead of making a deal means that this will cost Puerto Rico even more.” In another tweet he said “To kick things off, consider this: now the pensions are on the table. Bondholders will come for everything.” Most interesting to me was this tweet: “The centerpiece of the FOMB proposed litigation schedule is alien challenge of bondholder claims. Everyone should understand this is a radical move by the Board and an attack on the entire system  of municipal finance in the United States.”

What can we expect from all this? Judge Swain, on Saturday July 17, 2022, a few hours after the Board’s motion, ordered the parties to file any oppositions by Monday September 19, replies by September 20 and be ready for argument during the Omnibus of Wednesday, September 21, 2022.

It is clear that the Bondholders will file a motion to dismiss the Title III bankruptcy. Section 930(a) of the Bankruptcy Code states that if a plan of adjustment cannot be filed, the case must be dismissed. In addition, Bondholders will request the lifting of the stay for the appointment of a receiver for PREPA. I do not think the Judge will dismiss the Title III but we must remember the case is over 5 years old. The longest Chapter 9 case I can remember is San Bernardino, which lasted 6 years. Even if the Court were to adopt the Board’s schedule, a hearing of the summary judgment motions would be held around April of 2023. Giving the Court time to evaluate the motions, she would decide the issues by fall of 2023 and the losing party would immediately appeal. This could take between six months to a year, meaning summer or fall of 2024 for the dust to settle and determine whether a plan of adjustment could be filed. Yes, could. Even with the issues decided, there is no guarantee a confirmable plan of adjustment could be achieved.

In addition, the problem with litigation is that you may win, or you may lose. Even if the Board wins, this does not mean PREPA will not have to pay bondholders but could mean that their claims could be substantially impaired as unsecured creditors. It could also mean that more money could go to Utier and the PREPA Retirement Fund. On the other hand, if bondholders win, it will mean that they would have to be paid in full. Have no doubt that after not being paid for several years, bondholders will want their pound of flesh. In addition, it is likely that after such a victory, Bondholders will gain a receiver to increase the PREPA rates in order to pay them. This would mean substantial increase of the rates. Moreover, even if the Board wins, it would mean an increase in the rates to a lessor degree.

If the Court were to dismiss the Title III, many things will happen. Not having the protection of the automatic stay, PREPA would have a receiver appointed. Moreover, this would not mean the end of the challenge to the bonds but would shift it from Judge Swain to some other Court, most likely Federal Court in Puerto Rico. Several years of litigation would ensue before the issue of the liens would be decided.

In any of the two scenarios, with or without Title III, LUMA, the administrator of PREPA’s distribution system, could decide to let the contract expire by November 30, 2022. This would put in jeopardy the reconstruction of the electric grid, require AAFAF to get another company to handle the system and substantially increase the future cost to PREPA. Governor Pierluisi recently stated that instead of the $115 million LUMA charges, it would be charging between $180-200 million for its services during the transition.

From what the Board wrote in February 2022, it seems the RSA ceased being a good idea due to the increase of the fuel costs due to the war in Ukraine. Although this may be true, an increase in fuel costs was foreseeable at some point in time. Hence, contrary to what the Board said for a long time, the RSA was not a good idea. Its actions, however, are risking a substantial increase in rates as I explain supra, something we won’t know until later. It is my belief, however, that this stance is nothing more than a ploy to extract more concessions form bondholders. That is why the Board hedged its bet by also requesting  that the mediation team be standby. The question is whether it will be available. Now we must wait and see what Judge Swain decides.

WANDA STRIKES BACK

 

 

”All politics are local.” Thomas “Tip” O’Neill

 

For several weeks now, the Board has admonished the  Commonwealth stating that some of the laws it has approved violate  PROMESA in some way. It also informs the Commonwealth that these laws are not in effect. Although the Commonwealth knows that pursuant to PROMESA and Judge Swain’s decision of April 15, 2020 on Law 29, the Board must go to the Federal District Court in order to invalidate any law, on June 12, 2020, it filed not one but SIX complaints against the agency. In essence, the six complaints argue that the  Board’s actions are  “unreasonable from a public policy standpoint” but if not checked, “the  people of Puerto Rico will be disenfranchised because their local elected Government will be stripped of its policy making powers.” Although they are six complaints having to do with six different local laws, the legal argument is the same; the Commonwealth explained in compliance with PROMESA section 204 why these laws did not “substantially inconsistent with the fiscal plan.” Obviously, the Board did not agree.

 

What will happen now? After the proper briefing, the Court will likely dismiss these cases, probably sometime after August 9. In the law 29 case, decided on April 15, 2020, Judge Swain discussed the process for the certifications by the Commonwealth of laws that are not inconsistent with the Fiscal Plan. She decided that the Board’s decision was reviewable but that the standard of review is to be the deferential “arbitrary and capricious” standard used to review federal agencies’ interpretation of its own laws. PROMESA does not define what evidence is sufficient for the Board to be convinced that a particular law is not “substantially inconsistent with the Fiscal Plan” and she will give great deference to the Board’s interpretation. Since I was not privy to the evidence the Commonwealth presented to the Board, I cannot comment on it, but it seems likely Swain will side with the Board. Moreover, we must remember that in the Aurelius SCOTUS decision, Judge Breyer stated at page 17 “[i]n short, the Board possesses considerable power—in­cluding the authority to substitute its own judgment for the considered judgment of the Governor and other elected offi­cials.” Since that is precisely what the Board is  doing here, likelihood of success for the Commonwealth is not high. If so, why file not one but six complaints? I will explain.

I have the highest regard for Peter Friedman, the  Commonwealth’s attorney, who successfully opposed the appointment of Mr. Zamot as CEO of PREPA. He, as all attorneys, however, is bound by his client’s desires and as long as the proper warnings are issued, it is totally ethical to continue with a case that is not likely to succeed. The Governor’s motivations, however, are quite different. She has been a petty and supercilious politician all of her career in the Government. She, as all PR politicians, believe that the voter wants them to oppose the Board and since in the past she had been quoted as cooperating, this is, in her view, a necessary change. Also, the challenged laws are populistic in nature and she wants to be able to claim she tried her utmost to have them put into effect, but the evil Board” prevented her. Since Judge Swain is not likely to decide the issues before August 9, the day of the PNP primaries, she can claim the high ground against Pedro Pierluisi who, irrespective of what he says, is viewed as pro-Board and is (or was) related to one of its members. Also, if she were to win the PNP nomination, even if Judge Swain dismisses the complaints before the November election, she will appeal and still claim the high ground.

 

The sad part of this is that the Puertorrican taxpayer will pay the Commonwealth and the Board’s lawyers in these SIX CASES, money better put to use in other, more important endeavors. But that is the way the Puertorrican politicians operate.

That is why we are in Bankruptcy.

 

Let’s see what happens.