Puerto Rico: First Circuit Court Rejects JSF Appeal in AEE Bondholder Repayment Dispute
In a significant development, the First Circuit Court of Appeals has elected not to entertain the appeal filed by Puerto Rico’s Fiscal Oversight and Management Board (FOMB) regarding the repayment source for bondholders of the Puerto Rico Electric Power Authority (PREPA). This decision comes as hundreds of thousands of American citizens and tourists are affected by a widespread power outage in the U.S. territory.
The panel of judges comprising William Kayatta Jr., Jeffrey R. Howard, and Julie Rikelman issued this ruling on Tuesday, affirming a lower court’s decision from November 2021. The court determined that while bondholders can claim their share of PREPA’s approximate $8.5 billion debt, they will be paid based on the utility’s current and future net income from electricity sales.
In simpler terms, bondholders’ repayment source is PREPA’s net income, after the corporation fulfills its operational expenses and pension obligations for retirees. However, the appellate court referred to these net income as "general intangibles," which could include assets beyond mere cash balances.
Although the federal appeals court acknowledges bondholders’ claims, it also emphasized that they are not entitled to receive the full $8.5 billion. The FOMB argued that the ambiguity in defining PREPA’s net income could allow bondholders to claim a broader repayment source.
Earlier this month, the FOMB informed U.S. District Judge Laura Taylor Swain, who oversees Puerto Rico’s Title III bankruptcy cases, that it would amend PREPA’s restructuring plan once the First Circuit Court issued its decision. However, FOMB’s lead attorney, Martin Bienenstock, stated that confirming the plan might require additional decisions, such as defining PREPA’s current expenses and calculating the net income available for bondholders.
PREPA’s bankruptcy case, which is currently under judicial moratorium until July 31, 2023, requires the FOMB and bondholders to negotiate under mediation. Meanwhile, Puerto Rico’s incoming governor, Jenniffer González Colón, has proposed legislation to appoint an energy czar.
Following the First Circuit’s ruling, Justin Peterson, a former FOMB member and proponent of bondholders’ interests, issued a warning to the FOMB. Peterson, who previously served as a lobbyist for various investment funds holding Puerto Rican bonds, suggested that failure to reach an agreement with bondholders could result in the FOMB being replaced in January 2023, implying a potential intervention by President Donald Trump.
