UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

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:

In re: :

:

THE FINANCIAL OVERSIGHT AND : PROMESA

MANAGEMENT BOARD FOR PUERTO RICO, : Title III

:

as representative of : Case No. 17-BK-3283 (LTS)

:

THE COMMONWEALTH OF PUERTO RICO et al., : (Jointly Administered)

:

Debtors.1:

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:

In re: :

:

THE FINANCIAL OVERSIGHT AND : PROMESA

MANAGEMENT BOARD FOR PUERTO RICO, : Title III

:

as representative of : Case No. 17-BK-4780 (LTS)

:

PUERTO RICO ELECTRIC POWER AUTHORITY, : This filing relates only to 

Debtor PREPA and shall be 

filed in the lead Case No. 17-

BK-3283 (LTS) and Case No. 

17-BK-4780 (LTS)

:

:

:

Debtor. :

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1 The Debtors in these title III cases, along with each Debtor’s respective title III case number listed as a 

bankruptcy case number due to software limitations and the last four (4) digits of each Debtor’s federal tax 

identification number, as applicable, are the (i) Commonwealth of Puerto Rico (the “Commonwealth”)

(Bankruptcy Case No. 17-BK-3283 (LTS)) (Last Four Digits of Federal Tax ID: 3481), (ii) Employees 

Retirement System of the Government of the Commonwealth of Puerto Rico (“ERS”) (Bankruptcy Case No. 

17-BK-3566(LTS)) (Last Four Digits of Federal Tax ID: 9686), (iii) Puerto Rico Highways and Transportation 

Authority (“HTA”) (Bankruptcy Case No. 17-BK-3567 (LTS)) (Last Four Digits of Federal Tax ID: 3808), (iv) 

Puerto Rico Sales Tax Financing Corporation (“COFINA”) (Bankruptcy Case No. 17-BK-3284 (LTS)) (Last 

Four Digits of Federal Tax ID: 8474); and (v) Puerto Rico Electric Power Authority (“PREPA”) (Bankruptcy 

Case No. 17-BK-4780) (Last Four Digits of Federal Tax ID: 3747).

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STATEMENT OF OFFICIAL COMMITTEE OF UNSECURED CREDITORS IN 

RESPONSE TO URGENT JOINT MOTION OF THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO AND THE PUERTO RICO FISCAL 

AGENCY AND FINANCIAL ADVISORY AUTHORITY FOR ENTRY OF INTERIM 

AND FINAL ORDERS (A) AUTHORIZING POSTPETITION SECURED FINANCING,

(B) GRANTING PRIMING LIENS AND PROVIDING SUPERPRIORITY 

ADMINISTRATIVE EXPENSE CLAIMS, (C) MODIFYING THE AUTOMATIC STAY, 

(D) SCHEDULING A FINAL HEARING, AND (E) GRANTING RELATED RELIEF

The Official Committee of Unsecured Creditors of all title III Debtors (other than 

COFINA) (the “Committee”) hereby submits this statement (the “Statement”) in response to the 

Urgent Joint Motion of the Financial Oversight and Management Board for Puerto Rico and the 

Puerto Rico Fiscal Agency and Financial Advisory Authority for Entry of Interim and Final 

Orders (A) Authorizing Postpetition Secured Financing,(B) Granting Priming Liens and 

Providing Superpriority Administrative Expense Claims, (C) Modifying the Automatic Stay, (D) 

Scheduling a Final Hearing, and (E) Granting Related Relief [Docket No. 549 in Case No. 17-

4780 (LTS)] (the “Financing Motion”), pursuant to which PREPA and AAFAF2seek 

authorization to obtain postpetition financing from the Commonwealth, up to an aggregate 

amount of $1.3 billion in the form of a senior secured priming superpriority revolving credit 

facility (the “Financing”). In support of this Statement, the Committee respectfully states as 

follows:

STATEMENT

1. As the court is aware, the Committee represents unsecured creditors of both the 

Commonwealth and PREPA, i.e., the lender and the borrower, respectively, under the proposed 

Financing. Although the Committee is not formally objecting to the Financing Motion, given the 

Committee’s overarching responsibility as a “watchdog” for the Debtors in these title III cases, 

 

2 Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Financing 

Motion. 

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the Committee is duty-bound to advise the court of the Committee’s position and concerns3 with 

respect to the Financing. 

2. First, the Committee is, of course, supportive of PREPA having sufficient 

liquidity to operate and continue to operate as close as possible to ordinary course of business

under the circumstances.

4

 Moreover, the Committee recognizes that the Commonwealth and its 

unsecured creditors generally benefit from the continued operation of PREPA given the critical 

importance of a functioning electricity infrastructure. That said, PREPA and the Commonwealth 

are separate Debtors with separate asset pools and different sets of creditors, and, therefore, the 

impact and benefits of the Financing must be evaluated separately for creditors of each Debtor

and the Financing should be as close as possible to market terms.

3. Second, while the Committee generally supports PREPA’s efforts to obtain 

postpetition financing, the Committee believes that the proposed Financing does not reflect 

market terms from the point of view of the Commonwealth. This is especially true for the 

interest rate, which would be 0% for the first six months, increase by 50 basis points every six

months thereafter, and then top out at 3% after three years. Zero percent DIP loans do not exist 

in the marketplace, and this feature means that millions of dollars of value are being transferred 

from the Commonwealth and its creditors to PREPA (and possibly and unintentionally, to the 

benefit of the entity which will acquire PREPA pursuant to the recently announced privatization 

program). As a point of comparison, the PREPA secured bondholders previously offered 

postpetition financing to PREPA at an effective interest rate of approximately 8%.

 

3 The Committee has raised its concerns with respect to the Financing with the Oversight Board.

4 The Committee also supports the contemplated priming of the liens securing PREPA’s Power Revenue Bonds 

as part of the Financing. As to the appropriate amount of such financing, the Committee leaves it to the 

Oversight Board to satisfy its burden of proof. 

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4. The Committee recognizes that the court is being asked to authorize PREPA (not 

the Commonwealth) to enter into the proposed Financing. Indeed, the Oversight Board takes the 

position that the Commonwealth need not seek court authorization to use its funds to extend the 

Financing to PREPA on the grounds that (a) section 305 of PROMESA prohibits the court from 

interfering with any of the Commonwealth’s property or revenues, unless the Oversight Board 

consents,

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and (b) section 363 of the Bankruptcy Code is not incorporated into title III of 

PROMESA. However, the matter is not as clear-cut. In fact, in the proposed order attached to 

the Financing Motion, the Oversight Board is seeking a factual finding that the Financing is fair

to the Commonwealth.

6

 The Oversight Board cannot, on the one hand, claim that the court may

not interfere with the Commonwealth’s decision to enter into the Financing, but then, on the 

other hand, ask this court to bless the transaction from the perspective of the Commonwealth. 

By asking the court to make factual findings as it relates to the Commonwealth, the Oversight 

Board is, in essence, consenting to the court’s interference with the Commonwealth’s use of 

property and revenue, thereby taking the matter outside of section 305 of PROMESA. 

Accordingly, the court should evaluate the proposed Financing from the perspective of both

PREPA and the Commonwealth. 

5. Moreover, and regardless of the question of consent, the reach of section 305 is 

not unlimited and cannot (and should not) be viewed as a “carte blanche” for a title III debtor to 

do with its property however it pleases. For one, if taken to the extreme, section 305 would 

 

5

In this regard, the Committee is mindful of the court’s recent rulings in ACP Master Ltd. v. Commonwealth of 

Puerto Rico, Adv. Proc. No. 17-189 (LTS) and Assured Guaranty Corp. v. Commonwealth, Adv. Proc. Nos. 17-

155–156 (LTS), in which the court held, among other things, that section 305 of PROMESA bars the court

“from interfering with the [Commonwealths’] enumerated governmental powers, revenues and property ‘by any

stay, order, or decree, in the case or otherwise’ . . . ” Opinion and Order Granting Motion to Dismiss Plaintiffs’ 

Complaint Pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6) at 17 [Docket No. 124 in Adv. Proc. No. 17-189 

(LTS)].

6

Interim Financing Order ¶ D (“the terms of the Credit Documents are fair to the Lender [i.e., the 

Commonwealth] and the Debtor [i.e., PREPA]”) (emphasis added).

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arguably deprive the court of the ability to stop the Commonwealth from literally burning up all 

its cash. Indeed, as the court in In re City of Stockton, 486 B.R. 194, 199 (Bankr. E.D. Cal. 

2013) observed, there is a “limiting principle” embedded in section 904 of the Bankruptcy Code 

(i.e., the chapter 9 equivalent to section 305 of PROMESA) in that “overreaching may make it 

difficult to confirm a plan.” As the Stockton court explained that “the day of reckoning comes at 

the plan confirmation hearing,” id., at which time evidence of pre-plan transactions may be 

probative on confirmation issues, including that the plan be fair and equitable, not discriminate 

unfairly, and have been proposed in good faith and not by any means forbidden by law. Of 

course, these title III cases have not yet advanced to the plan confirmation stage; however, the 

point here is simply that issues of fairness and good faith when dealing with insider transactions 

cannot be altogether brushed aside on account of section 305 of PROMESA.

6. Finally, the Committee is also concerned about the general lack of transparency

with respect to the negotiation of the proposed Financing and the breakneck speed at which the 

Oversight Board, PREPA, and AAFAF are seeking court authorization of the Financing. This 

concern is especially acute given the insider nature of the proposed Financing—a transaction that 

AAFAF appears to have negotiated with itself. In this regard, the Committee would find it 

disconcerting if the Oversight Board and AAFAF refused to produce documents regarding the 

Financing on the basis of the deliberative process privilege. The Oversight Board and AAFAF 

should disclose the back-and-forth of negotiations (assuming such negotiations in fact occurred) 

if they are going to request that this court make findings regarding the fairness of the Financing. 

The Committee believes that transparency on intra-government transactions is of critical 

importance, not just for the proposed Financing, but for the operation of the Puerto Rico 

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government in general, the success of these title III cases, and the future of the Island of Puerto 

Rico. 

7. The Committee’s concerns about transparency are further exacerbated by the 

speed at which the Oversight Board and AAFAF are trying to obtain court authorization. While 

the Committee is, as noted above, sensitive to PREPA’s liquidity needs, PREPA did not file the 

Credit Agreement until after the general objection deadline, making it impossible for parties in 

interest to evaluate the terms of the transaction before the deadline. While the Oversight Board 

extended the Committee’s objection deadline until Friday at noon (ET), this short extension did 

not provide adequate time to properly vet the Credit Agreement. Accordingly, the Committee 

reserves the right to address at the February 7 hearing (a) any issues concerning the terms of the 

Credit Agreement and other controlling documents and (b) any changes that may be made to the 

proposed Interim Financing Order.

[Remaining page intentionally left blank.]

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Dated: February 2, 2018 /s/ G. Alexander Bongartz .

PAUL HASTINGS LLP

Luc. A. Despins, Esq. (Pro Hac Vice)

Andrew V. Tenzer (Pro Hac Vice)

Michael E. Comerford (Pro Hac Vice)

G. Alexander Bongartz, Esq. (Pro Hac Vice)

200 Park Avenue 

New York, New York 10166

Telephone: (212) 318-6000 

lucdespins@paulhastings.com 

andrewtenzer@paulhastings.com

michaelcomerford@paulhastings.com

alexbongartz@paulhastings.com

Counsel to the Official Committee of Unsecured 

Creditors

- and -

/s/ Juan J. Casillas Ayala .

CASILLAS, SANTIAGO & TORRES LLC

Juan J. Casillas Ayala, Esq., USDC - PR 218312

Diana M. Batlle-Barasorda, Esq., USDC - PR 213103

Alberto J. E. Añeses Negrón, Esq., USDC - PR 302710

Ericka C. Montull-Novoa, Esq., USDC - PR 230601 

El Caribe Office Building

53 Palmeras Street, Ste. 1601

San Juan, Puerto Rico 00901-2419

Telephone: (787) 523-3434

jcasillas@cstlawpr.com

dbatlle@cstlawpr.com

aaneses@cstlawpr.com 

emontull@cstlawpr.com

Local Counsel to the Official Committee of Unsecured 

Creditors

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