Hearing Date: February 15, 2018 at 10:30 a.m. (AST)

Reply Deadline: February 12, 2018 at 1:00 p.m. (AST)

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF PUERTO RICO

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In re

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO,

 as representative of

THE COMMONWEALTH OF PUERTO RICO, 

et al.,

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Debtors.

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PROMESA 

Title III

Case No. 17-BK-3283 (LTS)

(Jointly Administered)

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In re

THE FINANCIAL OVERSIGHT AND 

MANAGEMENT BOARD FOR PUERTO RICO,

 as representative of

PUERTO RICO ELECTRIC POWER 

AUTHORITY (PREPA),

Debtor.

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PROMESA 

Title III

Case No. 17-BK-04780 (LTS)

Court Filing Relates Only to PREPA

LIMITED REPLY OF SCOTIABANK DE PUERTO RICO, AS 

ADMINISTRATIVE AGENT, AND SOLUS ALTERNATIVE ASSET 

MANAGEMENT LP IN SUPPORT OF URGENT MOTION FOR ENTRY OF 

AN ORDER AUTHORIZING POSTPETITION SECURED FINANCING

 

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

bankruptcy 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-4780-LTS) (Last Four Digits of Federal Tax ID: 3747).

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Scotiabank de Puerto Rico (“Scotiabank”), as administrative agent for lenders 

owed approximately $550 million by the Puerto Rico Electric Power Authority (“PREPA”), and 

Solus Alternative Asset Management LP, on behalf of certain managed funds (collectively, 

“Solus”), as lenders of an additional $146 million to PREPA under a separate credit facility, 

respectfully submit this limited reply in support of the Oversight Board’s Financing Motion.2 As 

set forth in the Scotiabank Response and the Solus Response, the lenders under the Scotiabank 

and the Solus credit facilities (the “Fuel Line Lenders”) — although concerned about the size of 

the proposed financing — generally support the relief sought in the Financing Motion. This 

reply is being filed for the primary purpose of addressing a new argument put forward by 

Assured Guaranty Corp. and Assured Guaranty Municipal Corp. (together, “Assured”) in their 

supplemental objection to the Financing Motion. See Dkt. No. 652. 

STATEMENT OF SUPPORT

1. As explained in the Scotiabank Response and the Solus Response, the Fuel Line 

Lenders made pre-petition advances to PREPA (the “Fuel Line Advances”) to allow PREPA to 

buy fuel supplies. PREPA agreed that the Fuel Line Advances would “be treated as Current 

Expenses under the Trust Agreement” and would be recorded as “Current Expenses on its books, 

records and financial statements.”3

 

2 This reply is submitted in accordance with the Court’s order of February 6, 2018 permitting 

additional briefing relating to the Financing Motion [Dkt. No. 636]. Capitalized terms not defined have 

the same meanings as in the Response and Limited Objection of Scotiabank de Puerto Rico, as 

Administrative Agent, to Urgent Motion for Entry of an Interim Order Authorizing Postpetition Secured 

Financing (the “Scotiabank Response”) [Dkt. No. 572]. To avoid repetition, the Scotiabank Response 

and the Statement of Solus Alternative Asset Management LP in Response to the Urgent Joint Motion for 

Postpetition Secured Financing (the “Solus Response”) [Dkt. No. 576] are incorporated by reference.

3 Scotiabank Credit Agreement §§ 3.02, 2.14; Solus Credit Agreement §§ 3.02, 2.12. The 

Scotiabank Credit Agreement, Solus Credit Agreement, and other relevant documents were publicly filed 

in connection with the Motion of Scotiabank de Puerto Rico, as Administrative Agent, and Funds Advised 

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2. Although the Commonwealth financing will have priority over the Fuel Line 

Advances, the Fuel Line Lenders nonetheless support the proposed financing for the simple 

reason that PREPA needs liquidity and no superior alternative has been presented.4 The 

Commonwealth financing also includes certain favorable features, including low interest rates 

and no prepayment penalties. And while the Fuel Line Lenders would prefer that PREPA be 

permitted to borrow only what it is projected to need — which, based on PREPA’s cash flow 

forecast, is well below the $1.3 billion it has sought — PREPA and its creditors will clearly be 

better off with the Commonwealth financing than they would be without that financing. 

LIMITED REPLY

3. The purpose of this reply, aside from expressing support for the proposed 

financing, is to address a new argument put forward by Assured that has particular relevance to 

the Fuel Line Lenders and other holders of claims that are Current Expenses as defined in the 

Trust Agreement. In particular, in contesting the adequate protection provided to PREPA 

bondholders, Assured has asserted that the bondholders have a valid lien on all of PREPA’s 

cash, which attaches even before Current Expenses are paid. Assured Supp. Obj. at 2–3. To 

decide the Financing Motion, the Court does not have to address that assertion, because the 

Oversight Board has provided multiple grounds on which to conclude that the bonds are 

adequately protected. See, e.g., Oversight Bd. Reply ¶ 26 (“maintenance of infrastructure and 

 

by Solus Alternative Asset Management LP for Leave to Intervene [Adv. Pro. No. 17-00232, Dkt. No. 24] 

and are appended to the Declaration of Angela K. Herring [Adv. Pro. No. 17-00232, Dkt. No. 26].

4 In addition, at the request of the Fuel Line Lenders, the Oversight Board has made several 

changes to the Proposed Final Financing Order. As revised, the order: (a) expressly preserves all of 

PREPA’s set-off rights under applicable law, see Dkt. No. 640-1 at p. 10 [“Reservation of Rights”]; 

(b) requires notice and a hearing prior to any material amendment to the Credit Agreement, see id. ¶ 6 

[“Amendments, Consents, Waivers, and Modifications”]; and (c) provides that creditors may receive 

financial information regardless of their participation in mediation, see Dkt. No. 640-2 §§ 5-2, 5-3.

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assets generating revenue is sufficient adequate protection”). But, to the extent the Court does 

consider the scope of the bondholders’ lien, the Court should reject Assured’s position on the 

basis that it is thoroughly at odds with the terms of the Trust Agreement. 

4. Assured fundamentally misstates the terms of the Trust Agreement in arguing that 

the bondholders have a lien on all of PREPA’s cash, including cash received by PREPA that is 

used to pay Current Expenses. As summarized below, the Trust Agreement provides the Trustee 

with a lien on PREPA’s net revenues — i.e., revenues that are deposited into a “Sinking Fund” 

after payment of Current Expenses. PREPA’s bondholders have no valid and perfected lien on 

PREPA’s gross cash revenues. 

5. The Trust Agreement contains specific instructions to PREPA regarding the 

disposition of its “Revenues,” defined as “all moneys received by [PREPA] in connection with 

or as a result of its ownership or operation of the System.”5

 First, Section 503 of the Trust 

Agreement creates a “General Fund” into which all Revenues are deposited.

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6. Section 505 then requires that “moneys in the General Fund will be used first for 

the payment of the Current Expenses of the System.”7 Section 505 also provides that Current 

Expenses will not exceed amounts that are “reasonable and necessary” and included in the 

“Annual Budget”; those separate covenants, however, in no way detract from PREPA’s 

obligation to pay all Current Expenses “first” out of the General Fund. Indeed, Section 505 

 

5 Trust Agreement at 24.

6 Trust Agreement § 503.

7 Trust Agreement § 505 (emphasis added). “Current Expenses” are defined in part as PREPA’s 

“reasonable and necessary current expenses of maintaining, repairing and operating the System.” Id. at 

15 (definition of “Current Expenses”). 

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provides that if Current Expenses “exceed the total amount provided in the Annual Budget,” 

PREPA simply has to report “such excess” in writing.8

7. Under the Trust Agreement, the bondholders’ lien does not attach to PREPA’s 

cash deposits until PREPA has paid its Current Expenses and excess amounts (if any) have been 

transferred out of the General Fund. Section 506 of the Trust Agreement directs PREPA to 

transfer its revenues — after payment of Current Expenses — from the General Fund to a 

“Revenue Fund.”9 Section 507 then requires that amounts in the Revenue Fund be transferred to 

a “Sinking Fund” and other subaccounts controlled by the bond Trustee. The cash deposits in 

those specified accounts, as opposed to deposits in the General Fund, are “subject to a lien . . . in 

favor of the holders of the bonds.”10 

8. The Trust Agreement, accordingly, only grants the bond Trustee a lien on “Net 

Revenues,” defined to mean “the amount of the excess of the Revenues for such period over the 

Current Expenses for such period.”11 The lien attaches when Current Expenses have been paid 

in full and excess amounts have been transferred to the Sinking Fund or other subaccounts 

controlled by the Trustee. The Trustee has no lien on cash held in the General Fund or on other 

accounts that are not controlled by the bond Trustee.12 

 

8 Trust Agreement § 505.

9 Trust Agreement § 506.

10 Trust Agreement § 507(h); see also Trust Agreement at 5 (form of Power Revenue Bond) 

(Sinking Fund is “pledged to and charged with” payment of principal and interest on bonds).

11 Trust Agreement at 18 (emphasis added).

12 The Trust Agreement defines the term “Opinion of Counsel” to mean a written opinion stating

that the Trust Agreement “creates a legally valid and effective pledge of the Net Revenues.” Trust 

Agreement at 18–19 (emphasis added). Consistent with that definition, the legal opinion from Sidley 

Austin, PREPA’s counsel, appended to the August 15, 2013 Official Statement for the 2013A bond

issuance, says that the Bonds are “payable solely from the Sinking Fund” and that the Sinking Fund “is 

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9. Ignoring all of the above, Assured cites Section 701 of the Trust Agreement in 

support of its assertion that the bondholders have a lien on PREPA’s gross revenues. See 

Assured Supp. Obj. at 1. But Assured quotes only part of the provision. Under Section 701, 

PREPA’s “Revenues” are “pledged to the payment” of the bonds, but only “in the manner and to 

the extent hereinafter particularly specified.”13 As explained above, multiple provisions of the 

Trust Agreement limit the “extent” of the revenue pledge and show that it is a pledge of Net

Revenues only. 

10. The conclusion that the Trust Agreement grants only a Net Revenue pledge is 

further mandated by the fact that the lien at issue is on cash in deposit accounts, which can only 

be perfected by control. As noted above, “Revenues” are defined by the Trust Agreement not as 

receivables but as “moneys received” — namely, cash in PREPA’s deposit accounts. Under 

Section 9-314(a) of the Uniform Commercial Code, a secured party must have control to perfect 

an interest in a deposit account. See 19 L.P.R.A. § 2264(a). The Trust Agreement does not grant 

any lien on the General Fund, nor does it provide the bond Trustee with any control over the 

General Fund, as opposed to the Sinking Fund. Accordingly, even if the Trustee somehow had a 

lien on gross revenues, the lien would not be perfected.

11. In sum, contrary to Assured’s argument, PREPA’s bondholders do not have a lien

(perfected or otherwise) on PREPA’s gross revenues; any lien is net of payment of Current 

Expenses. The Fuel Line Lenders thus agree with the Oversight Board that — as long as the 

proceeds of the new financing are used to pay Current Expenses — the bondholders have no 

 

pledged to and charged with the payment of the principal of and interest on such bonds. . . .” PREPA, 

Power Revenue Bond Official Statement for Series 2013A (Aug. 15, 2013) App’x IV ¶ 6. 

13 Trust Agreement § 701.

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basis to claim that they lack adequate protection. The Fuel Line Lenders further agree that the 

obligations to repay the Commonwealth financing are themselves Current Expenses under the 

Trust Agreement, and that the Financing Motion should be granted based on the structure set 

forth in the Proposed Final Financing Order and the Credit Documents submitted to the Court. 

Dated: February 12, 2018 Respectfully submitted,

/s/ Antonio A. Arias

Antonio A. Arias

USDC-PR No. 204906

aaa@mcvpr.com 

MCCONNELL VALDÉS LLC

270 Muñoz Rivera Avenue, Suite 7

Hato Rey, Puerto Rico 00918

P.O. Box 364225

San Juan, Puerto Rico 00936-4225

Telephone: (787) 250-5604 

Facsimile: (787) 759-9225

/s/ Richard G. Mason

Richard G. Mason (admitted pro hac vice)

Amy R. Wolf (admitted pro hac vice)

Emil A. Kleinhaus (admitted pro hac vice)

Angela K. Herring (admitted pro hac vice)

WACHTELL, LIPTON, ROSEN & KATZ

51 West 52nd Street

New York, New York 10019

Telephone: (212) 403-1000

Facsimile: (212) 403-2000

Email: rgmason@wlrk.com

arwolf@wlrk.com

eakleinhaus@wlrk.com

akherring@wlrk.com

Attorneys for Scotiabank de Puerto Rico, as 

Administrative Agent

/s/ Jose L. Ramirez-Coll

Jose L. Ramirez-Coll

USDC-PR No. 221702

jramirez@amrclaw.com

ANTONETTI MONTALVO & 

RAMIREZ-COLL

P.O. Box 13128

San Juan, Puerto Rico 00908

Telephone: (787) 977-0303

Facsimile: (787) 977-0323 

/s/ Sandy Qusba

Sandy Qusba (admitted pro hac vice)

Bryce L. Friedman (admitted pro hac vice)

Nicholas Baker (admitted pro hac vice)

SIMPSON THACHER & BARTLETT LLP

425 Lexington Avenue

New York, New York 10017

Telephone: (212) 455-2000

Facsimile: (212) 455-2502

Email: squsba@stblaw.com

bfriedman@stblaw.com

nbaker@stblaw.com

Attorneys for Solus Alternative Asset 

Management LP

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