Paul, Weiss Ad Hoc Group Defection Is Latest Turn in Near Reset of PREPA Restructuring Since 2024 Confirmation Trial; Path Unclear With Title III Case on the Brink

Legal Analyst: Lucas Hammonds

The disclosure this week that the ad hoc group of Puerto Rico Electric Power Authority, or PREPA, bondholders advised by Paul Weiss, known as the majority member ad hoc group, has committed to terminate its participation in the August 2023 bondholder plan support and settlement agreement, or PSA, with the PROMESA oversight board and join the nonsettling bondholder cooperation agreement represents the latest in a series of events that amount to a near reset of PREPA’s Title III case since the 11-day confirmation trial for the utility’s modified fourth amended plan of adjustment concluded without a ruling in March 2024.

According to the Aug. 25 joint informative motion announcing the move, the switch will occur on Oct. 1 unless the oversight board obtains confirmation of a plan of adjustment incorporating the PSA’s terms by that date. The Oct. 1 deadline – which there is no clear path to meet with just over 30 days remaining after PREPA’s Title III case has been pending for more than eight years – corresponds to the plan confirmation and effective date deadline under an October 2024 PSA amendment.

The majority member ad hoc group’s defection is a potentially fatal blow to the prospect of confirming any Title III plan that resembles the current iteration because the PSA formed the backbone of both the fourth amended plan the oversight board sought to confirm in 2024 and the currently proposed fifth amended plan.

Under the fifth amended plan, bondholders who joined the settlement embodied in the PSA would receive consideration equal to at least 16.503% of their asserted claims, while bondholders who did not accept those terms or join an earlier 2023 bondholder settlement would receive cash in an amount equal to their pro rata share of the aggregate of the amounts in the sinking fund established under the 1974 trust agreement for the bonds and the present value of PREPA’s net revenues. The sinking fund had a balance of approximately $16 million as of the July 2, 2017, petition date, and the oversight board has stated that the present value of the utility’s net revenues is “zero.”

It is unclear whether this framework, which would likely face opposition from nonsettling bondholder parties, could withstand the majority member ad hoc group’s switch. The most recent Rule 2019 statement for the group, filed in January, indicated that its members held approximately $2.25 billion in uninsured bonds and approximately $72.1 million in insured bonds, and the Aug. 25 joint informative motion stated that “nearly 90% of all of PREPA’s outstanding revenue bonds” would be subject to the bondholder cooperation agreement if the majority member ad hoc group were to join.

In addition, the forms of proposed creditor consideration detailed in the fifth amended plan include cash proceeds of up to $1.886 billion of Series B bonds that would be purchased by bondholder parties BlackRock Financial Management, Whitebox Advisors, Franklin Advisers, Nuveen Asset Management and Taconic Capital Advisors under a forward delivery bond purchase agreement executed in connection with the PSA. Those parties are members of the majority member ad hoc group, along with Hudson Bay Capital Management LP, according to the most recent Rule 2019 statement.

A collapse of the current plan resulting from the majority member ad hoc group’s switch could also call into question other settlements incorporated into the plan, including settlements with PREPA’s fuel line lenders, Vitol Inc., the official committee of unsecured creditors, and Unión de Empleados Profesionales Independiente de la AEE. This could reopen issues that were resolved or deferred under the settlements, including whether the approximately $700 million settled fuel line loan claims or any portion of the over $4.8 billion in asserted general unsecured claims identified in the disclosure statement qualify as current expenses that are entitled to priority repayment under the trust agreement.

The majority member ad hoc group’s commitment to join the nonsettling bondholder cooperation agreement, apparently precipitated by President Donald Trump’s recent dismissal of six of the seven members of the oversight board, leaving John Nixon as the sole remaining member, is the latest in a series of events that have ripped the case from the precipice of plan confirmation last year.

In June 2024, before the Title III court issued a confirmation ruling, the U.S. Court of Appeals for the First Circuit reversed key components of the Title III court’s 2023 rulings that limited the secured portion of the bondholders’ claim to amounts held in the sinking fund and estimated the resulting unsecured net revenue claim at $2.388 billion. The First Circuit concluded that the bondholders have a nonrecourse claim against the PREPA estate of “roughly” $8.5 billion, representing the principal amount of the bonds plus matured interest. The appellate court also held that the claim is secured by PREPA’s net revenues, including future revenues, irrespective of whether they were deposited into the sinking and subordinate funds established under the trust agreement.

The First Circuit subsequently issued a revised ruling that addressed rehearing petitions filed by the oversight board, the UCC and the Puerto Rico Fiscal Agency and Financial Advisory Authority, or AAFAF, and reiterated the June 2024 ruling’s central conclusions. The First Circuit then denied oversight board, UCC and AAFAF requests for rehearing of the revised ruling without explaining its reasoning.

In July 2024, after the First Circuit’s initial ruling, former settling bondholder party National Public Finance Guarantee Corp. rescinded its plan support and joined the nonsettling bondholder cooperation agreement.

The Title III court also stayed all plan confirmation and bondholder rights-related litigation, including a pending request by nonsettling bondholder parties GoldenTree Asset Management and Syncora Guarantee for relief from the automatic stay to seek the appointment of a receiver. The court urged the oversight board and nonsettling bondholders to work toward a consensual plan in order to avoid protracted litigation in the Title III case or, alternatively, protracted multifront litigation outside of Title III, which the court said could “resemble a Hobbesian state of nature in which every interest, including the people of Puerto Rico, fends for itself.”

After a series of extensions and unsuccessful mediation, which included the exchange of settlement proposals that were publicly disclosed in October 2024, the Title III court this March modified the stay to permit the filing of the fifth amended plan and litigation of several specific issues. The permitted litigation included a request by the nonsettling bondholders for the allowance of a $3.7 billion administrative expense claim, which the court has taken under advisement, and a request by the oversight board to classify PREPA bond trustee U.S. Bank’s proof of claim in the commonwealth Title III case as a Class 64 section 510(b) subordinated claim under the confirmed commonwealth plan of adjustment rather than a Class 58 commonwealth general unsecured claim, which the court granted. The nonsettling bondholder parties have appealed the latter ruling.

In February, while the litigation stay remained in place, the oversight board publicly released the certified 2025 fiscal for PREPA. The fiscal plan stated that the “headroom” identified in prior fiscal plans to impose a rate charge to pay the utility’s legacy debt “no longer exists” and that PREPA will not be able to impose rate increases for debt service above the rates necessary to pay for increased fuel and purchased power costs and maintenance costs. This set the table for the fifth amended Title III plan, which eliminated both the legacy charge under the prior version of the plan that would have been used to pay debt service on new bonds and the prior plan’s contingent value instruments, or CVIs, that would have provided additional recoveries if PREPA outperforms its post-restructuring projections.

After a PREPA-related congressional hearing in July, the Puerto Rico Energy Bureau, or PREB, approved a provisional rate increase in the regulator’s ongoing rate case for PREPA and private operators Luma Energy and Genera PR for fiscal years 2026, 2027 and 2028 that stands to provide significantly less incremental revenue than the parties requested. The provisional revenue requirement established by PREB in connection with the provisional rate increase did not contemplate any funding for PREPA’s legacy bond debt in light of the utility’s unresolved Title III case.

Trump subsequently dismissed six of the oversight board’s seven members, which was followed by this week’s disclosure of the majority member ad hoc group’s intention to join the nonsettling bondholder cooperation agreement on Oct. 1.

With PREPA’s Title III case now on the brink, the path toward a resolution and the contours of that resolution are anyone’s guess. The oversight board does not appear to have sufficient time to confirm a Title III plan before Oct. 1 with standard notice under the Federal Rules of Bankruptcy Procedure, as the rules provide for at least 28 days’ notice of the time to object to both a disclosure statement and a plan, as well as the hearing – or hearings – to consider DS approval and plan confirmation.

In addition, the oversight board has stated a preference to pause pending administrative expense claim discovery and any related hearings until new board members are appointed, while the nonsettling bondholders contend that a statutory quorum of at least four members is required to move forward, because the current single-member board “has limited powers and lacks the authority to resolve the case or to certify a fiscal plan, among other things.”

The UCC, for its part, says administrative expense-related litigation should not be stayed pending new board appointments, as it intends to object to bondholder claims “regardless of what the Oversight Board does.”

The publicly stated positions of the oversight board and the nonsettling bondholders also remain billions of dollars apart, with the bondholders maintaining that their claim could top $12 billion after accounting for prepetition and postpetition interest.

Meanwhile, former oversight board member Justin Peterson has called for the board to withdraw the fifth amended plan and predicted that a newly constituted board can reach a deal with creditors “very quickly” by deploying a combination of funding sources, including “$12 billion in excess” commonwealth cash reserves and proceeds from a CVI.

However, former oversight board members Andrew Biggs and David Skeel have expressed concern about the potential use of commonwealth resources to fund a settlement with bondholders and the potential for the new board members to align themselves with bondholder interests over the interests of the commonwealth government despite the board’s fiduciary duty to represent the debtor in Title III proceedings.

Biggs and Skeel also raised questions regarding Puerto Rico’s legal options if it is directed by the oversight board to transfer commonwealth funding to pay for a PREPA settlement, noting that the commonwealth has no legal obligation to pay PREPA’s debt, and highlighted the potential for legal action challenging Trump’s board-member firings on the ground that PROMESA allows removal only for cause.