Oversight Board announces deal with some PREPA bondholders

A “substantial number” of Puerto Rico Electric Power Authority bondholders agreed in principle to a settlement, the Puerto Rico Oversight Board announced Thursday afternoon.

As a result, the board sought and received an extension to Aug. 18 for the deadline to submit a proposed plan of adjustment.

Board Spokesman Matthias Rieker said the board wouldn’t comment further than the court statement.

Earlier Thursday, a source said familiar with the negotiations said bondholders were split into three groups: one that was nearing a deal, one that plans to seek to overturn any plan of adjustment the U.S. District Court approves, and a third group of recent purchasers of PREPA debt that may end up settling or seeking to overturn the deal.

The first group is led by BlackRock Financial Management, which as of February held $710 million of uninsured PREPA bonds, said the source who wished to remain anonymous and doesn’t own PREPA debt.

Dominic Frederico
Assured Guaranty CEO Dominic Frederico said he expected his firm would litigate against the Oversight Board’s plan of adjustment rather than settle.

Roger Tully

The second group, which includes bond insurer Assured Guaranty, opposes settling anywhere near the terms the board is offering. In June the board said it could guarantee payment of no more than 12.5% to bondholders who had not already settled. Three days later U.S. District Judge Laura Taylor Swain said bondholders had a claim to $2.4 billion of the $8.5 billion owed to them. 

Assured Guaranty CEO Dominic Frederico said during the firm’s second quarter earnings conference call on Wednesday, the board’s offer is “insulting to say the least. So obviously, our view is litigation is the path that we’re going to take.” As of March, Assured insured $446 million of net PREPA par. 

In response to Frederico’s comment, the board said, “The Oversight Board continues to work with PREPA’s creditors on a debt restructuring plan that is fair to creditors and sustainable for PREPA and Puerto Rico.”

Further, the statement said the board is “documenting a settlement with significant bondholders who find its offer acceptable and it hopes Assured will too.”

The third group, mostly hedge funds that bought the bonds relatively recently at low prices, has not decided whether to settle or to appeal an approved plan. They are an important wildcard, the source said, because they are trying to maximize returns as opposed to stop losses.

The first group may include Nuveen Asset Management and Franklin Advisers, the source said. As of February, Nuveen held $1.122 billion of PREPA bonds, of which $20 million was insured, and Franklin held $372 million, of which $37 million was insured.

GoldenTree Asset Management, with $1.006 billion in uninsured PREPA bonds, and perhaps a hedge fund may be in the second group, the source said. GoldenTree filed a statement with the court Thursday saying it “hasn’t been invited to, and has not participated in, any settlement discussions or mediation conversations.”

The statement noted GoldenTree’s concern delays will increase “the ongoing prejudice to the approximately $8.4 billion of revenue bonds, which have been in a continuous state of default since 2009, and which have not received any payment whatsoever since 2014.”

GoldenTree seeks “consensual resolution,” assailing the board for trying “to buy plan support from some, but not all bondholders, through improper classification and disparate treatment,” which it says won’t offer a “timely or efficient conclusion of this process.”

Swain has made her rulings based on equity rather than on the law, the source said. This has pressured bondholders.

In this context, the board has succeeded in its effort to split bondholders, the source said, but in the long term the board has “overplayed its hand.”

The holdouts will appeal any plan of adjustment approved using various legal arguments, according to the source, who believes they will succeed in overturning the approved plan of adjustment and get better terms.

Some of the bondholder groups will have the opportunity to challenge the board-proposed plan of adjustment at the confirmation hearing on multiple grounds, the source said. They may succeed in improving the plan somewhat at that stage, but most of the potential for improvement will come on appeal.

As of February, besides those funds already mentioned, the other funds in the Ad Hoc Group of PREPA Bondholders were Invesco Advisers, Taconic Capital Advisors, and Whitebox Advisors. Invesco held $667 million, of which $158 million was insured, Taconic held $111 million, all of it uninsured, and Whitebox held $120 million, all of it insured. In February the group held a total of $3.9 billion in uninsured PREPA bonds.

Swain hopes to hold a plan of adjustment confirmation hearing in November or December.

Neither BlackRock nor Franklin Advisers responded to a request for a comment for this story. Nuveen declined to comment.

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