Brattle Analysis Integral to Court Ruling Determining the Allowed Claim of PREPA Bondholders
A federal judge recently found that the holders of over $8 billion in bonds issued by the Puerto Rico Electric Power Authority (PREPA) have a $2.39 billion claim in the utility’s bankruptcy proceeding. US District Court Judge Laura Taylor Swain accepted Brattle’s model and leveraged its valuation analysis when issuing her decision.
PREPA had over $8 billion in bonds outstanding when the utility filed for bankruptcy on July 3, 2017. In a March 2023 summary judgment ruling regarding the nature and amount of the PREPA bondholders’ claim, Judge Swain ruled that, in addition to a secured claim on specific funds set aside for bond repayments, the bondholders also had an unsecured claim equal to the value of the future revenues expected to be deposited in those funds. The Financial Oversight and Management Board (FOMB) for Puerto Rico asked Brattle to estimate the amount of this claim.
David Plastino, leader of the firm’s Bankruptcy & Restructuring practice, developed a model estimating the future cash flows expected to flow to the bondholders as of the bankruptcy petition date. Mr. Plastino determined the present value of these cash flows to be $2.1 billion. The bondholders argued that the present value of the future cash flows expected to flow to the bondholders was at least equal to the face value of the bonds plus accrued interest as of the petition date. Judge Swain accepted Mr. Plastino’s model, applied certain adjustments, and estimated the bondholders’ claim to be approximately $2.39 billion.
Judge Swain cited Mr. Plastino’s testimony in her decision, noting, “Mr. Plastino has credibly predicted both that the net revenues which could be available to pay on the Bonds would be substantially less than predicted by the Bondholders’ expert and that significant risks could have existed creating obstacles for a receiver seeking to maximize funds available for debt service, including immediate needs to make capital expenditures on infrastructure to keep PREPA operating and generating revenues well into the future.”
Judge Swain also noted that, “The Court has determined, after consideration of the evidence and expert testimony, that Mr. Plastino’s model is the most appropriate model as it contemplates a net revenue stream that is set to be derived and paid through a method that should be relatively affordable for ratepayers, reflects the impact of system maintenance and improvements that will be required to keep the system generating revenues over a lengthy period, and includes a present value discount factor for the time value of money and general market perceptions of risk.”
