Puerto Rico’s junk-rated power utility is discussing with creditors the possibility of allocating cash from its operating account toward a July 1 bond payment, according to a person with direct knowledge of the talks.
The Puerto Rico Electric Power Authority, called Prepa, must pay investors $416 million of principal and interest that day. While its reserve fund is about $150 million short, Prepa has money in its operating account to make up the difference and is discussing with creditors whether it would direct cash to make the full payment, said the person, who asked for anonymity because the negotiations are private. Most of the bonds maturing July 1 are insured.
There is “a high probability that some form of default will occur” on July 1, Richard Donner, a Moody’s Investors Service analyst in New York, said in a report this month. In the case of default, bondholders may see recovery rates of 65 percent to 80 percent, he said.
If discussions continue to move toward an agreement on how to revamp the utility and restructure its $9 billion of debt, investors, banks and bond insurers may extend a forbearance agreement that expires June 30, according to two people with direct knowledge of the talks, who asked not to be identified because the discussions aren’t final. That contract keeps the talks out of court.
Discussions are continuing, but no agreement has been reached, Jose Echevarria, a Prepa spokesman in San Juan, said in an e-mail.
The utility may not need to restructure its debt, some bondholders say. It can avoid that path if it accepts a creditor plan that includes a $2 billion cash injection to stabilize the agency, said Bruce Richards, chief executive officer at New York-based Marathon Asset Management.
The company, which manages about $12 billion and invests in distressed debt, is part of a group of hedge funds and other owners of Prepa bonds.
“Marathon maintains a position that it does not require restructuring, that it’s a very valuable asset company, if it’s a bit more efficient” and built its own power plants, Richards said in a telephone interview.
Commonwealth officials have said for months that a Prepa turnaround would require sacrifice from investors, bond insurers, ratepayers and unions.
Prepa bonds maturing in July 2040, the utility’s most actively traded debt in the past month, changed hands Wednesday at an average of 51.2 cents on the dollar, the lowest since May 14, data compiled by Bloomberg show.
Dan Zacchei, a representative for the forbearing bondholders at Sloane & Co., declined to comment, as did Kevin Brown at Armonk, New York-based bond insurer MBIA Inc., Ashweeta Durani at Hamilton, Bermuda-based Assured Guaranty Ltd. and Michael Corbally at Syncora Guarantee Inc. in New York.