UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF PUERTO RICO 

In re: 

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO, 

as representative of 

THE COMMONWEALTH OF PUERTO RICO et al., 

Debtors.1

PROMESA Title III 

No. 17 BK 3283-LTS 

(Jointly Administered) 

In re: 

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO, 

as representative of 

PUERTO RICO ELECTRIC POWER 

AUTHORITY, 

Debtor. 

PROMESA Title III 

No. 17 BK 4780-LTS 

SUPPLEMENTAL OBJECTION OF THE PREPA BOND TRUSTEE TO URGENT 

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

 

1

 The Debtors in these Title III cases, along with each Debtor’s respective Title III case number and the last four (4) 

digits of each Debtor’s Federal tax identification number, as applicable, are the (i) Commonwealth of Puerto Rico 

(Bankruptcy Case No. 17 BK 3283-LTS) (Last Four Digits of Federal Tax ID: 3481); (ii) Puerto Rico Sales Tax 

Financing Corporation (“COFINA”) (Bankruptcy Case No. 17 BK 3284-LTS) (Last Four Digits of Federal Tax ID: 

8474); (iii) Puerto Rico Highways and Transportation Authority (“HTA”) (Bankruptcy Case No. 17 BK 3567-LTS) 

(Last Four Digits of Federal Tax ID: 3808); (iv) 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); and (v) Puerto Rico Electric Power Authority (“PREPA”) (Bankruptcy Case No. 17 BK 04780-LTS) 

(Last Four Digits of Federal Tax ID: 3747). 

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To The Honorable United States District Court Judge Laura Taylor Swain: 

U.S. Bank National Association, solely in its capacity as trustee for the PREPA 

Bondholders (the “Trustee”), respectfully submits this Supplemental Objection (the 

“Supplemental Objection”) to the DIP Motion [Dkt. No. 549 at 17-4780 and No. 2298 at 17-

3283]]. The Trustee hereby incorporates by reference the arguments made in its initial objection 

[Dkt. No. 568 at 17-4780 and No. 2341 at 17-3283] (the “Trustee Objection”)2 in full. The 

Trustee continues to oppose the DIP Motion on the grounds asserted in the Trustee Objection 

and in other objections that the Trustee has joined in.3

 If, however, the Court is inclined to grant 

the DIP Motion, the Trustee wants to make sure that the Court is advised of serious defects in the 

Financing Order and revised Credit Agreement filed by the Movants on February 6, 2018 [Dkt. 

No. 640 at 17-4780 and No. 2422 at 17-3283], that must be corrected. The Trustee respectfully 

submits the following non-exhaustive list of such corrections. 

I. The Financing Order and Credit Agreement Improperly Delegate Future Priming 

Loan Approval Authority to Cooperating Insiders. 

1. Paragraphs 2, 3, and 4 of the Financing Order authorize PREPA to enter into the 

Credit Agreement, make binding all obligations of PREPA under the Credit Agreement, and 

confer corresponding rights upon the Commonwealth as Lender. The Credit Agreement, in turn, 

permits the Commonwealth, with PREPA and the Oversight Board, but without further approval 

of this Court, to: (1) step up the amount of the initial Revolving Credit Commitment from $550 

million in increments of up to $250 million (see Credit Agreement, definition of “Step Increase” 

 

2

 Capitalized terms not defined herein shall have the meanings ascribed to them in the Trustee Objection and, if not 

defined therein, as defined in the DIP Motion and, if not defined therein, in the Credit Agreement and, if not defined 

therein, as defined in the Trust Agreement. Unless otherwise noted, docket entries referred to herein are from 

PREPA’s Title III case, Bankruptcy Case No. 17 BK 04780-LTS. 

3

 This includes supplemental objections filed by parties whose objections the Trustee had already joined (together 

with the Trustee Objection and Supplemental Objection, the “PREPA Objections”) 

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at p. 8); (2) fund additional Revolving Credit Loans, and/or refinance existing Revolving Credit 

Loans with proceeds of any loan from either the federal government or any third party lender 

(Credit Agreement, § 2-7); (3) pass the newly negotiated interest rate on to PREPA on a basis 

that primes the Revenue pledge of the Trustee and Bondholders; and (4) assign the 

Commonwealth’s rights under the Credit Agreement. (Credit Agreement, §§ 2-7, 13-1(c)). 

2. Section 301 of PROMESA and 11 U.S.C. § 364(c) and (d) expressly require 

approval of post-petition loans to PREPA by this Court. Instead, Movants seek to designate 

PREPA, the Commonwealth and the Oversight Board as a triumvirate that can broadly determine 

and implement PREPA’s future post-petition financing arrangements without Court oversight. 

This is highly unfair to Bondholders and violates PROMESA. PREPA and the Commonwealth 

enjoy common control and are openly adverse to the Bondholders’ lien rights. When they seek 

to prime the security interests of Bondholders, even in the case of a genuine liquidity crisis, they 

should be required to submit concrete loan proposals, and modifications to the terms of existing 

loans, to this Court. As currently drafted, the Financing Order and Credit Agreement sidestep 

this requirement and must be corrected. A loan that results in the loss of Court oversight is not a 

cheap loan from the point of view of Bondholders. 

II. The Financing Order Fails to Solve the Problem of Material Modifications. 

3. In response to objections, the Movants added language to paragraph 6 of the 

Financing Order requiring Court approval before “material” amendments to the Credit 

Agreement become effective. This protection is illusory. The economic terms of the Revolving 

Credit Loans can be altered—significantly—within the parameters of the Credit Agreement.4

 

 

4

For example, the Movants are able to substitute a new Lender (§ 13-1(c)), increase the amount of Revolving Credit 

Loans through a Step Increase, expand the permitted use of proceeds to “Ineligible Uses” (§ 4-13), and make 

numerous other changes to the proposed facility as the Credit Agreement is currently drafted. See also § 12-4(b).

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Moreover, paragraph 6 only covers formal Credit Agreement amendments, not consents and 

waivers in the performance of the Credit Agreement, which are effectively the same thing. The 

Financing Order should be revised to require disclosure of all modifications, consents and 

waivers.5

 It should also require Court approval of actions that will result in deviations from the 

current terms of the existing Credit Agreement including, without limitation, economic terms, 

refinancings, or Step Increases. 

III. The Credit Agreement Could Improperly Pass Through to PREPA Unlimited 

Interest Rate Increases from Commonwealth Financings. 

4. Section 2-7 of the Credit Agreement provides that if the Commonwealth 

refinances any Revolving Credit Loan, whatever interest rate applies to such refinancing is 

passed through to PREPA automatically. It is beneficial to the estate to pass along price savings, 

such as through a community disaster loan (“CDL”). However, as drafted, the Credit Agreement 

exposes PREPA to unilateral interest rate increases from deals made by the Commonwealth with 

private lenders. This provision should be corrected. Moreover, the Financing Order should 

impose an affirmative obligation upon PREPA and the Commonwealth to seek CDL financing 

and refunding of the outstanding Revolving Credit Loans on as favorable of terms as possible, 

including loan forgiveness to the fullest extent possible. If any terms of CDLs or other 

financings are less favorable to PREPA than the terms in the current Credit Agreement, PREPA 

 

5

 The Order refers to Credit Documents and asks the Court to make findings about them, but only the Credit 

Agreement has been provided. This finding is inappropriate to the extent the other Credit Documents (or any 

amendments thereto) contain terms not consistent with the Credit Agreement. In addition, all Credit Documents and 

amendments thereto should be publicly filed with the Court on the docket. The Financing Order should also impose 

the same standard on amendments to the Credit Documents. 

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should be required to seek Court approval of such revised terms before entering into such loans, 

with adequate notice to provide third parties an opportunity to object or provide better terms.6

IV. The Financing Order Includes Improper Provisions Regarding the Application of 

Proceeds after Acceleration and Current Expenses. 

5. The Credit Agreement improperly establishes a post acceleration waterfall that 

subordinates the rights of Bondholders in the application of Revenues with respect to other 

classes of creditors. Even after payment of the Revolving Credit Loans, Section 9-2 provides 

that all “Current Expenses” are to be paid before Bondholders. Such a provision demonstrates a 

misunderstanding of the Trust Agreement and is completely inappropriate, since the Revolving 

Credit Loans will have already been paid off.7

 Moreover, Section 9-2 provides that 

administrative expenses covered by the Commonwealth’s Carve Out are to be paid before 

Bondholders. The relative priority of Bondholders and administrative expense claims is 

established by the Bankruptcy Code and governing agreements. The Commonwealth and 

PREPA have no right to impose subordination upon Bondholders to which they did not agree. 

The Credit Agreement should be restricted to providing for the repayment of the Revolving 

Credit Loans, and all priority issues other than those involving the Revolving Credit Loans 

should properly be left to the application of the Bankruptcy Code and the Trust Agreement. 

6. Paragraph 10 of the Financing Order provides that “the Debtor’s repayment 

obligations to Lender for amounts borrowed under the Facility shall be deemed to be “Current 

 

6

 To the extent PREPA enters into a loan on worse terms, PREPA and the Commonwealth should be required to 

prioritize payments of loans that will not be forgiven or that have worse economic terms. Cf. Credit Agreement 

§§ 2-6(c) & 12-5. 

7

 Payment of budgeted and reasonable Current Expenses is a permitted use of pledged Revenues. See, e.g., Trust 

Agreement § 505. Additionally, PREPA’s representation that loan proceeds will only be used for Current Expenses 

is not correct for the reasons stated in the PREPA Objections. The Financing Order should provide that both loan 

proceeds and Revenues may only be used for payment of Current Expenses permitted under the Trust Agreement 

that were incurred on or after the date of the funding of the Revolving Credit Loans. 

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Expenses” under the Trust Agreement.” This gratuitous provision implicates potential disputes 

between Bondholders and other prepetition lenders and should be stricken. 8 It is both improper 

and unnecessary. If it is meant to clarify that payments on the Revolving Credit Loans are 

permitted under the Credit Agreement, which is an obvious point, the Financing Order should 

simply state as much. 

V. The Court Should Limit the Validations and Protections in Paragraph 4 of the 

Financing Order. 

7. Paragraph 4 of the Financing Order validates all of PREPA’s “obligations” and all 

of the Commonwealth’s rights in the Credit Agreement and potential future agreements that no 

party has yet seen. The proposed Facility is controlled by insiders. The Court should not 

preclude itself from revisiting the Financing Order, as it would in post-petition financing 

arrangements between arms’ length parties. If the rights and privileges conferred by the Credit 

Agreement and Financing Order are misused to deprive the Trustee or Bondholders of their 

rights under PROMESA, the Trustee and Bondholders must be allowed to seek relief. 

VI. The Court Should Require Transparency. 

8. PREPA and the Commonwealth seek to prime existing Bondholders and impose a 

new debt burden on the rate payers of Puerto Rico. In light of the material impact the Revolving 

Credit Loans will have on various parties-in-interest, the Financing Order should require timely 

publication of all reporting provided to the Lenders under Article V of the Credit Agreement, 

Budgets and Proposed Budgets, and a list of accounts receivable with aging with specific line 

items for Commonwealth and each agency and instrumentality. PREPA should be required to 

comply with the specific requests for information and access to information included in the 

 

8

 The Financing Order should also contain a provision stating that, except as explicitly provided in the Financing 

Order, nothing in the Financing Order or the Credit Documents shall alter the rights of parties-in-interest, including 

under the Trust Agreement and under applicable law.

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PREPA Objections. The Financing Order should also require the appointment of a monitor to 

ensure that PREPA is acting properly, including billing and collecting, and to report its findings 

and recommendations (including recommendations regarding rates) to stakeholders. 

VII. The Court Should Limit Provisions to Prevent the Commonwealth from Receiving a 

Windfall if PREPA Underperforms its Repayment Obligations. 

 9. There are a number of provisions in the Credit Agreement that are inappropriate 

given the common control between the Commonwealth and PREPA. The Commonwealth, 

through AAFAF, can have a material impact on the magnitude of Revenues that PREPA collects. 

If PREPA fails to generate sufficient Revenues to repay Revolving Credit Loans, the 

Commonwealth should not see an upside under the Credit Agreement. Accordingly, the step-up 

interest rate mechanism should be removed and the interest rate on all Revolving Credit 

Advances should be zero percent. Default interest should also be removed from the Credit 

Agreement. Section 8-1 should be modified such that the Commonwealth cannot declare a 

payment default unless the Oversight Board certifies that the Commonwealth took all available 

measures to boost PREPA’s Revenues. Similarly, there should be a requirement for the 

Commonwealth and PREPA to demonstrate that they took all available measures to collect on 

currently outstanding governmental receivables before any Step Increase is permitted.9

VIII. The Scope of the Proposed Priming Lien Is Unclear and Problematic. 

10. Section 8 of the Financing Order grants a priming lien only on Revenues, but then 

references the Credit Agreement in a manner that creates ambiguity as to the exact scope of the 

purported lien. The Credit Agreement’s description of “Collateral” is broader than the definition 

in the Financing Order because it grants a security interest in the funds in an undefined set of 

 

9

 The Financing Order should also provide that any loans or grants that the Commonwealth receives from agencies 

or departments of the United States Government in respect of business operations at PREPA must be used to pay off 

the Revolving Credit Loan. 

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“Other Accounts.” Other Accounts are vaguely defined and not specifically identified in the 

Credit Agreement. This must be changed or clarified. First, the scope of the priming lien should 

be defined with particularity in the Financing Order itself without reference to the Credit 

Agreement. The Credit Agreement is modifiable, and nothing prevents the Commonwealth or 

PREPA from changing the scope of the security interest. Second, the scope of the priming lien 

should be limited to PREPA’s interests in Revenues. For example, there are certain funded 

accounts established or held in trust by PREPA or by the Trustee under the Trust Agreement 

with current balances (e.g., the Construction Fund, which has a balance consisting of bond 

proceeds and is held in trust by PREPA). These “Other Accounts” are not subject to any 

“netting” of Current Expenses and, therefore, absent the provision of adequate protection, the 

grant of a lien on “Other Accounts” should be removed. If the “Other Accounts” are not so 

removed from the scope of the lien, then the “Other Accounts” and funds therein must be 

identified with specificity and the Trustee reserves the right to challenge any purported grant of 

priming liens in existing funds held in “Other Accounts” to the extent of any trust rights held by 

the Bondholders or by the Trustee under the Trust Agreement. 

Conclusion 

For the reasons stated herein, the Trustee respectfully requests that the DIP Motion be 

denied. If, however, the Court is inclined to grant the DIP Motion, the Trustee respectfully 

requests that the Financing Order and Credit Agreement be modified as described herein and to 

otherwise address the concerns set forth in the PREPA Objections. 

Respectfully submitted in San Juan, Puerto Rico, on February 9, 2017. 

We certify that on this same date we filed this objection in the ECF System of the 

Bankruptcy Court for the District of Puerto Rico, Case Nos. 17-4780 and 17-3283. 

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RIVERA, TULLA AND FERRER, LLC 

/s Eric A. Tulla 

Eric A. Tulla 

USDC-DPR No. 118313 

Email: etulla@ riveratulla.com 

/s Iris J. Cabrera-Gómez 

Iris J. Cabrera-Gómez 

USDC-DPR No. 221101 

Email: icabrera@riveratulla.com 

Rivera Tulla & Ferrer Building 

San Juan, PR 00917-1212 

Tel: (787)753-0438 

Fax: (787)767-5784 

MASLON LLP 

By: /s Clark T. Whitmore 

Clark T. Whitmore (admitted pro hac vice) 

Jason M. Reed (admitted pro hac vice) 

90 South Seventh Street, Suite 3300 

Minneapolis, MN 55402 

Telephone: 612-672-8200 

Facsimile: 612-672-8397 

E-Mail: clark.whitmore@maslon.com 

jason.reed@maslon.com

ATTORNEYS FOR U.S. BANK NATIONAL 

ASSOCIATION, IN ITS CAPACITY AS 

TRUSTEE 

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