The Puerto Rico Electric Power Authority, the main supplier of electricity in the struggling U.S. territory, said it agreed with creditors to delay repayment of bank loans until March. Bond prices jumped to the highest since June.
The agency, known as Prepa, uses the lines of credit to buy fuel. It was scheduled yesterday to repay $146 million to Citigroup Inc. unit Citibank and $525 million to a syndicate of banks led by Scotiabank de Puerto Rico, which is serving as administrative agent. Prepa, which has $8.6 billion of debt, had already pushed back payments last month after using $41.6 million of reserves to pay investors July 1.
Under the agreement, Prepa must appoint a chief restructuring officer by Sept. 8 and come up with a five-year business plan by Dec. 15, according to a statement the utility released yesterday. Prepa must also deliver a debt restructuring plan by March 2.
The announcement “is an important milestone in the transformation of Prepa and gives us a clear line of sight to the future,” Harry Rodriguez, president of Prepa’s board of directors, said in the statement.
The utility, which used $100 million from its capital fund in May to buy fuel, said it will make full debt-service payments during the term of the agreements. The agency must repay about $214 million to bondholders on Jan. 1, according to New York-based advisory firm NewOak.
Investors in the $3.7 trillion municipal-bond market have been speculating that Prepa would be the first Puerto Rico public corporation to use the island’s new debt-restructuring law to reduce obligations.
Prepa would represent the largest restructuring ever in the state and local-debt market, exceeding the $8 billion of general obligations and water-and-sewer debt in Detroit’s record bankruptcy last year. Unlike Motor City investors, most holders of Prepa debt don’t have bond insurance.
Puerto Rico and its agencies have about $73 billion of debt. Most of the securities are tax-free nationwide, leading 66 percent of U.S. muni mutual funds to hold them, according to Morningstar Inc.
Bond funds affiliated with Franklin Resources Inc. and Oppenheimer Rochester Funds filed a lawsuit saying the Puerto Rico Public Corporation Debt Enforcement and Recovery Act, approved by lawmakers in June, is unconstitutional. In papers filed this week in San Juan, they urged U.S. District Judge Francisco A. Besosa to rule immediately rather than wait to see how or whether the statute is applied.
Some of the longest-maturing Prepa bonds extended their rally after reaching as low as 33.2 cents on the dollar July 10.
Uninsured Prepa securities due in July 2040 traded today at 53 cents on the dollar, the highest since June 26, data compiled by Bloomberg show. That was the day Fitch Ratings downgraded the authority to CC, its third-lowest speculative grade, citing a probable restructuring or default. The debt changed hands at an average price of 47.6 cents yesterday.
An amendment to bond documents will let Prepa use about $280 million in its construction fund to pay for expenses and capital improvements, according to the statement. That will facilitate cleaner and more efficient fuel delivery.
Robert Julavits, a spokesman for New York-based Citigroup, declined to comment. Paula Cufre, a spokeswoman at Toronto-based Bank of Nova Scotia, referred questions to Prepa.
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