The Puerto Rico Electric Power Authority may miss a January interest payment to investors, according to Municipal Market Advisors, potentially triggering the largest restructuring ever of state and local debt.
The agency, called Prepa, used $41.6 million of reserve funds to help make a $417.6 million payment to bondholders on July 1. With the reserve now depleted by about 10 percent, “we expect the bond trustee is unlikely to make any more distributions to bondholders, reserving cash for likely litigation expenses,” Matt Fabian, a managing director at Concord, Massachusetts-based MMA wrote today in a report.
The next payment is due Jan. 1, according to Fabian. Unless the utility replenishes the reserve, investors in uninsured Prepa bonds “have likely seen their last cash in awhile,” wrote Fabian, who’s been analyzing the municipal-debt market for 18 years.
While a new law aims to restructure some Puerto Rico public-corporation debt outside of a bankruptcy filing, Prepa’s $8.6 billion alone exceeds the $8 billion of general obligations and water-and-sewer debt in Detroit’s record bankruptcy and Jefferson County, Alabama’s $4.2 billion failure.
About 70 percent of the debt from Prepa, which supplies most of the commonwealth’s electricity, doesn’t have bond insurance, data compiled by Bloomberg show. The agency is a prime candidate to restructure its obligations under the law passed last month that allows certain public corporations to negotiate with bondholders to reduce debt.
Fitch Ratings on June 26 cut Prepa to CC, its third-lowest speculative grade. Standard & Poor’s and Moody’s Investors Service also give it junk ratings.
Uninsured Prepa bonds maturing July 2022 traded today at 4:54 p.m. at an average price of 45.13 cents on the dollar, down from 64.1 cents on June 24, the day before Governor Alejandro Garcia Padilla filed the new debt-restructuring law, Bloomberg data show.
Prepa has $671 million in bank lines of credit maturing by mid-August, which it can’t repay, according to S&P.