PREPA bankruptcy appears headed to litigation as board breaks off talks

Bonds

Puerto Rico Electric Power Authority mediation ended Saturday morning and the Oversight Board is proposing that litigation commence, as the sides were unable to reach an agreement.

“[S]harp differences over what a reasonable settlement is” remain, the board said. The sides “also differ on some key legal issues.”

The current round of mediation started in late March.

If the board submitted a proposed plan of adjustment, it said, it would result in “significant litigation” because “of the parties’ divergent views, and dismissal of the case would be chaotic for PREPA and jeopardize its ability to provide power to the commonwealth.”

Therefore, it believes “the only practical option is to propose a litigation schedule to narrow or resolve the issues between the parties,” the board told the U.S. District Court for Puerto Rico on Saturday.

Puerto Rico Oversight Board Member Justin Peterson said a consensual PREPA deal had been in reach and would have been the optimal solution for everyone.

The litigation schedule the board proposed has several possible routes, but projects conclusion by April 5, 2023.

Bankruptcy Judge Laura Taylor Swain had put an 11:59 p.m. Friday deadline on the mediation process but gave the mediators the option to extend the deadline to Sept. 30 if they notified her.

The board said Saturday because of the “impasse” in negotiations with the bondholders, it was resuming litigation against them.

“The Oversight Board’s objective has always been to reach an agreement that would reduce PREPA’s debt to affordable levels,” said Board Chairman David Skeel. “The cost of any debt repayment would be passed on to PREPA consumers, and the Oversight Board analyzed carefully what we can expect the residents and businesses of Puerto Rico to pay for electricity. Electricity rates are a key to Puerto Rico’s economic future.”

Swain entered an order giving parties until 9 a.m. Atlantic Standard Time, Monday to respond to the board’s proposed schedule and related motion, and until 9 a.m. Tuesday to respond to any filings. She said she will hear arguments on the motion at an already-scheduled omnibus hearing on Wednesday.

Board Member Justin Peterson released a statement, “The decision by the [board] to abandon global mediation is extremely disappointing. A deal to end bankruptcy and avoid costly and lengthy litigation with PREPA’s largest creditors was clearly in reach, but rather than making a deal, the [board] walked away from the table at the 11th hour.

“PREPA’s bondholders … have been paid nothing for eight years, and have been treated shabbily throughout this entire process,” Peterson said.

A deal “would have catalyzed much-needed private-sector investment to rebuild and modernize Puerto Rico’s grid and would have provided the citizens of Puerto Rico with cleaner, more reliable, and more affordable power,” Peterson said. “Now, all of this could be delayed for years due the [board’s] preference for litigation over making deals.”

The board said litigation would focus on whether the bondholders’ interest securing their bond claims is limited to the money the authority deposits in accounts the bond trustee created pursuant to the bonds’ trust agreement.

The PREPA bondholders’ group could not immediately be reached for comment. It is possible they will call for a different response to the breakdown of mediation.

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