Welcome to your weekly Title III update for February 20, 2018. This week was dominated by the PREPA Interim Financing request.

On Thursday, February 15, Judge Swain heard evidence and arguments pertaining to the PREPA loan. The hearing started with testimony by Mr. Filsinger, detailing the dire consequences of not granting the DIP loan and the way the system would be shut down, starting with residential clients being cut off. Mr. Filsinger did explain that if the $550 million was lent, by June 2019, PREPA would be OK. There was no evidence presented, however, for the need for $1 billion the Board requested.

Things started to go south when Gerardo Portela, head of AFFAF, came on. Portela sent 27 letters to different Commonwealth agencies for them to pay the PREPA bill, but did not put the total amount owed by these corporations, rather an amount he determined was adequate. When asked why not loan to public corporations, there was an objection by his attorneys. Bondholders cleverly did not insist on the answer to the question. In addition, Portela did not know of the law of 2016 that required that in 45 days the public corporations and PREPA would have to determine how much they owed the utility and in 60 days work out a payment plan. He is also unfamiliar with the law of his agency, which makes you wonder how effective a manager he can be.

Although AFFAF was the agent for the Commonwealth and PREPA on the loan negotiations, Mr. Portela was not present in all the meetings, he had other people dealing with it. He did not know if anything else was offered by the Commonwealth as to the loan or if different terms were offered by the Commonwealth or even if different interest rates were offered. All in all, Mr. Portela was a terrible witness that seemed not to understand simple questions that were posed to him. This happens when witnesses think they are brighter than the attorneys posing the questions, or maybe he’s tired and looking for the exit door.

Dustin Mondell from Rothchild testified that this was not an  “arm’s length negotiation,” as required, rather it was a cooperative negotiation. Also, Mr. Mondell said that FEMA would approve the CDL loan if the Hacienda TSA account went down to $800 million. PREPA negotiations started when the FEMA letter was received. There were no negotiations for other lenders. As Gibbs rule #39 states, “There is no such thing as a coincidence.” Obviously, the Commonwealth and the Board want to empty out the General Fund so it can qualify for the CDL loan from the Federal Government. The Board and the Governor must think no one in Washington is watching.

Judge Swain, however, threw a monkey wrench on the Board and Commonwealth plans. Judge Swain ruled that PREPA needed money but movants have not proven need or legality of the $1 billion loan. There was no evidence of negotiations on the loan and that there were no “arm’s length negotiations.” She stated she was willing to approve a $300 million non-priming loan, superpriority administrative expense, but the record must be clear about robust effort for third party financing. She also stated that the Business Judgment test is inadequate because bondholders’ interest must be considered. Any proposed order must include Ad Hoc GO’s bondholders’ observations and objections.

Early Friday morning, approximately 4:21 am Puerto Rico time, the Board filed their new request for a loan, but also stated that they would seek further loans in two to four weeks. On Friday afternoon, Judge Swain gave objectors until 7 pm Puerto Rico time on Saturday to file and the Board until Sunday at 3 pm Puerto Rico time to respond. As expected, there were objections.

National objected to the proposed order stating the following:

“[A]s written, it is directly contrary to the Court’s oral ruling at the February 15, 2018 Hearing on PREPA’s Financing Motion (the “Hearing”) in a number of respects, including: (i) as to the applicable legal standard (i.e., entire fairness, not Movants’ invented “permissible judgment as a governmental instrumentality”); (ii) as to the Court’s ruling that the requirement of Section 364(e)’s good-faith showing has not been met; and (iii) as to the Court’s admonition to include in the proposed order only essential provisions.”

The Ad Hoc Group of PREPA bondholders filed a short encompassing objection. I found especially telling that it objected to the use of the Business Judgment standard invented by the Board, especially after the Judge stated that it “focused solely on rationality from a PREPA business point of view is inappropriate.”

The PREPA Bond Trustee also objected and said, inter alia:

“The Movants’ draft attempts to retain priming features in the Revenues that either fail to credit the Court’s ruling or presume the outcome of litigation not properly before the Court. Secondly, there are changes proposed to clarify that the promises of the Authority in the Credit Agreement need to be consistent with: (i) the Authority’s obligations under the Trust Agreement, without attempting to resolve what those duties are; and (ii) the Financing Order and the realities of what can legally be done under Title III of PROMESA on account of a super-priority administrative expense claim.”

The GO Ad Hoc Group of Bondholders also filed a detailed objection, but also stated what everyone in Puerto Rico knows:

“The Commonwealth’s persistence in offering below-market terms to PREPA is also of a piece with its ongoing attempts to undercut the possibility of any private, arms-length financing for PREPA, including the financing offer recently proposed by PREPA’s bondholders. This pattern began with AAFAF’s inexplicable delay in beginning any search for private financing, continued when that search amounted to nothing more than a token effort to check the boxes, and culminated when the Commonwealth offered terms so favorable to PREPA that no arms-length lender could possibly compete. This irresponsible course of conduct has now placed the Court in an impossible position, with the Oversight Board and AAFAF asking for approval of financing on an emergency basis because PREPA faces serious liquidity challenges that were entirely avoidable if AAFAF and the Oversight Board had made a serious effort to secure private financing alternatives.

All of this is part of a cynical effort to make the Commonwealth’s liquidity appear less than it really is—to game the federal government and the Commonwealth’s own creditors. And it is just the latest in the Commonwealth’s continual strategy—aided and abetted by the Oversight Board—of withholding or manipulating information in order to game the system.

The GO Group therefore urges AAFAF and the Oversight Board to heed the Court’s direction that, to the extent they intend to seek approval of a larger financing facility for PREPA in the future, the record must “demonstrat[e] far more robust efforts to solicit third-party financing on terms that do not include super-priority or security provisions.”

The Board’s reply to the objections was lengthy and attempts to convince the Judge that objectors’ concerns were addressed but that is unlikely for a couple of reasons. First, the Board said twice that the Third Supplemental Filsinger Declaration demonstrates that Commonwealth would not lend without superiority status. If one examines the declaration, however, that is not what Mr. Filsinger said:

“I asked Secretary Maldonado if the Government would be willing to make a proposal with terms more favorable to PREPA than those proposed by the ad hoc PREPA bondholders.

Secretary Maldonado advised me that he believed that the Government’s creditors and constituents preferred a 364(d) priming lien but in light of PREPA’s urgent cash flow crisis and the negative implications for the Government if PREPA runs out of money, the Government would be prepared to offer unsecured financing of $300 million on the following terms: (i) the Facility would have superpriority status (pursuant to 11 U.S.C. § 364(c)(1)), and (ii) the interest rate on the Facility would be increased from that set forth in the original proposal to 5% per annum.”

Nowhere does Mr. Filsinger state that the Commonwealth refuses to lend to PREPA otherwise and have the lights go out. But the Board stated that at pages 11 and 13 of its motion and Judge Swain will not appreciate this since she reads all documents. Moreover, the Board’s motion states that it denied around half of the objections to the financing and most of the objections to the Financing Document.

Moreover, PREPA has commenced to shutdown part of its systems redundancies allegedly to prepare in case the loan does not come through. This completely obviates the Commonwealth’s obligation to come to PREPA’s aid lending the $300 million since it claims it does not need permission to do so. Moreover, the Commonwealth could use the same $300 million it is to lend PREPA to lend to the public corporations so they can pay PREPA. They can even prepay PREPA as allegedly the Commonwealth did. No responsible government would jeopardize the peace of mind of its citizens by refusing to lend to its power utility but apparently that is what the Governor and the Board are willing to do to obtain CDL financing.

Nevertheless, Judge Swain approved the loan on Monday, February 19. Let there be no doubt about this; the Board suffered a major defeat when Judge Swain did not approve its original DIP petition. The fact that Judge Swain reduced the loan to $300 from the original $1.3 billion that was requested shows she did not believe the Board and AFFAF’s experts and witnesses. The changes made to the loan documents were substantial, as stated by the Board’s motion for the $300 million loan:

“The material changes in the Revised Financing are:

1. Principal Amount. Reduced to $300 million.

2. Interest Rate. Fixed at 5% per year.

3. Superpriority. Unchanged.

4. Collateral. Eliminated.

5. Good Faith Lender Finding for 11 U.S.C. § 364(e). Eliminated.

6. Insulation from Attack in the Commonwealth Title III Case. Eliminated.”

In addition to this, the order also places constraints on future changes to the loan, as for example, a CDL loan from the federal government:

“Amendments, Consents, Waivers, and Modifications.

(a) Subject to the approval of the Oversight Board, the Debtor may enter into any amendments, consents, waivers, or modifications to the Credit Documents, in accordance with the terms thereof, without the need for further notice and hearing or any order of this Court; provided, however, that to the extent any material amendment, material consent, material waiver or material modification to the Credit Agreement or any other Credit Document, including without limitation Sections 9-2, 4-13, 5-5, and 5-6 of the Credit Agreement, is approved by the Oversight Board (for the avoidance of doubt, including any refinancing of the Facility), such material amendment, material consent, material waiver or material modification or any other material change (however accomplished) shall not become effective without further Court order, which shall be submitted on presentment with notice to parties in interest in accordance with the case management procedures then in effect in the Debtor’s Title III case. For the avoidance of doubt, such material amendments, consents, material waivers, or material modifications subject

to this paragraph shall include any consent to the use of proceeds of the Facility to fund or otherwise pay for any Ineligible Uses; provided, however, that the foregoing shall not prevent the Court from ordering, or a party from requesting, a more extended briefing schedule and a hearing relating to such submission, nor shall it prejudice any party’s right to object to any such extension request.

(b) In the event the Facility is funded through a Commonwealth Financing that results in a material change to or additional economic terms of the Facility or any other transfer or assignment of any rights under the Credit Documents, such change or addition shall not become effective without further Court order, which shall be submitted on presentment with notice to parties in interest in accordance with the case management procedures; provided, however, that the foregoing shall not prevent the Court from ordering, or a party from requesting, a more extended briefing schedule and a hearing relating to such submission, nor shall it prejudice any party’s right to object to any such extension request.”

Moreover, PREPA, in accordance with Article 5 of the Loan Document, must provide:

“5.2 Weekly Reports. On the Wednesday of each week following the Effective Date, the Borrower shall provide the Lender and the Oversight Board, with copies made available to the Committee and the creditors of the Lender and the Borrower who are party to the Mediation Agreement or a customary non-disclosure agreement with the Borrower, with (i) an update to the Budget (which shall include reconciliation of actual results with the prior Budget), (ii) cash balance, (iii) total accounts payable and, if available, accounts payable aging schedule, (iv) grid restoration report for so long as any restoration activities are ongoing, (v) generation restoration report for so long as any restoration activities are ongoing and (vi) a FEMA Flash Report for so long as applicable.

5.3Monthly Reports. No later than the fifteenth (15th) day of each month following the Effective Date, the Borrower shall provide the Lender and the Oversight Board, with copies made available to the Committee and the creditors of the Lender and the Borrower who are party to the Mediation Agreement or a customary non-disclosure agreement with the Borrower, with an updated schedule of accounts receivable, and, if available, accounts receivables aging schedule.”

Although the loan document states that the Board and AFFAF will attempt financing again in 2-4 weeks, they better come up with more convincing financial information for the Judge to approve it.

This summary is merely what I believe are the more salient motions and decisions in the cases. I receive an average of 20 filings each day so it would be impossible to summarize everything. If you have legal interest in these cases, I urge you to hire an attorney to represent you.