San Juan, PR – November 27, 2024 – The Financial Oversight and Management Board for Puerto Rico today issued the following statement:
On June 12, 2024, the United States Court of Appeals for the First Circuit issued an opinion determining that the collateral security of holder of bonds issued by the Puerto Rico Electric Power Authority (PREPA) was broader than the U.S. District Court for the District of Puerto Rico had ruled in the bankruptcy-like proceedings under Title III of PROMESA. The more collateral the bondholders perfected security interest covers, the more PREPA must pay them to restructure its bond debt.
The Oversight Board believed the First Circuit erred, and it requested the appellate court to correct its ruling on the grounds that the bondholders had not properly perfected their security interest in the broader portion of the collateral.
After requesting further briefing and considering the issue, the First Circuit ruled on November 13, 2024, that the Oversight Board’s position was reasonable, and it assumed the Oversight Board’s position was correct. However, the appellate court formulated a new theory under which the bondholders would still benefit from the broader collateral security the appellate court had originally identified.
The Oversight Board believes the First Circuit’s new theory is erroneous. That is why on November 27, 2024, it requested the appellate court to reconsider its new opinion and to correct it.
To benefit from their collateral in PREPA’s restructuring case, the bondholders must not only have a security interest, but they must also have “perfected” it. Perfection refers to the type of public notice a creditor must provide the public of its rights in collateral. When it comes to money and bank accounts, the law generally requires that the creditors have possession or control of the money or bank account. For many other forms of collateral such as inventory or accounts receivable, security interests can be perfected by filing certain public notices. In the PREPA Title III case, the collateral is PREPA’s Net Revenues defined as the money PREPA receives less its current expenses.
The Oversight Board believes the bondholders’ security interest in PREPA’s Net Revenues is a security interest in money and bank accounts and must be perfected by possession or control. The First Circuit’s second opinion concludes the Net Revenues are “general intangibles” because the Net Revenues may sometimes exist in forms other than money or bank accounts. Security interests in general intangibles can be perfected by filing certain public notices, which the bondholders did.
The dispute is about whether the Net Revenues are only money and bank accounts. The Oversight Board believes they are. The First Circuit and bondholders currently assert they are not.
The request for the First Circuit to reconsider its November 24 opinion and correct it is another step by the Oversight Board towards a responsible debt restructuring that will end PREPA’s bankruptcy and leave PREPA with the critical resources to make the investments necessary to provide Puerto Rico with reliable electricity. The people and business of Puerto Rico deserve no less.