Puerto Rico's Stalled Electric Deal Shows Long Path to Shed Debt

  • Lawmakers face Dec. 7 deadline to allow utility to reorganize
  • `Little time left' to negotiate on other bonds, Moody's says

Even before Puerto Rico moves to restructure its $70 billion of debt, the trial run with its electric utility is showing just how hard that will be.

It took more than a year of fitful negotiations for the Puerto Rico Electric Power Authority, known as Prepa, to strike a deal with bondholders, who in November agreed to take losses of 15 percent. The utility is still in talks with MBIA Inc., Assured Guaranty Ltd. and Syncora Guarantee Inc., which insure some of its $8 billion of debt against default. And officials are bumping up against another hurdle: the agreement could unravel if island lawmakers don’t pass needed legislation by Dec. 7.

The protracted process for the utility shows the difficulty Puerto Rico faces in seeking to persuade investors to accept less than they’re owed on its bonds, which were sold by more than a dozen different agencies. Governor Alejandro Garcia Padilla told a U.S. Senate committee Tuesday that the island is on the brink of “a very long and chaotic process” if Congress doesn’t give it the ability to file for bankruptcy, citing Prepa as a precedent.

“As the Prepa situation continues to drag on unresolved, there’s precious little time left to determine how to resolve those other disputes,” said Ted Hampton, an analyst covering Puerto Rico at Moody’s Investors Service in New York. “It has effectively used up a lot of the time to address negotiations over the other bond types.”

The fiscal crisis sweeping the island of 3.5 million is rapidly escalating as the government runs out of cash and remains locked out of the capital markets, where for years it raised money to paper over shortfalls in its budget. Garcia Padilla said the island has few options left to avoid a major default, and his administration plans to push investors to voluntarily exchange their bonds for new securities with lower interest rates or longer maturities, similar to what Prepa is tying to do.

Prepa’s restructuring would be the largest ever in the $3.7 trillion U.S. municipal market and represent a first step by Puerto Rico to reduce its debts. The utility’s strains are due in part to the failure to upgrade its plants to ween them from costly fuel oil, which has left it charging electric rates that are among the highest in the U.S., even though almost half the population lives below the poverty line. As a result, there are hundreds of millions of dollars in unpaid bills.

Bankruptcy Not Option

Unlike U.S. cities or other publicly-owned corporations, Prepa can’t file for bankruptcy to have its debts reduced in federal court, and Republicans who control Congress have shown little interest in giving it the power to do so. That’s curbed it’s bargaining power, leaving it dependent on out-of-court negotiations with creditors who can sue if they’re not paid.

Prepa reached an agreement Nov. 5 with hedge funds and mutual funds holding about 35 percent of its bonds, as well as lenders that finance its fuel purchases. Under the accord, investors would exchange their bonds for new securities worth 85 percent of the ones they own.

Legislative Approval

The fate of that pact is still far from certain. The debt exchange requires legislative passage of a bill that would create a new board of directors at Prepa, allow it to enter into public-private partnerships and improve its collection of outstanding bills. The new bonds must receive an investment-grade rating, which is likely only if bond insurance companies agree to guarantee the securities.

Last week, a day or two before Thanksgiving, Prepa and bond insurers had verbally agreed on a term sheet detailing how to restructure the bonds they back, according to three people with direct knowledge of the negotiations, who asked for anonymity because the talks are private. This week, that verbal agreement fell apart, they said.

They insure about $2.5 billion of the utility’s debt. Anything less than 100 cents on the dollar could leave them on the hook to investors.

Bargaining Power

Greg Diamond, a spokesman for MBIA, Michael Corbally, a spokesman for Syncora and Ashweeta Durani, a spokeswoman for Assured, declined to comment.

Because the utility may need the insurance companies to back the new debt, they will probably be able to drive a harder bargain and avoid the type of losses that bondholders accepted, said Mark Palmer, a managing director at BTIG LLC in New York who follows the companies.

Those negotiations may be complicated by steps Puerto Rico took this week to avoid missing payments on general-obligation bonds, which have the highest legal priority. To pay those bondholders, the government has started raiding money that’s supposed to pay for $7 billion of other debt.

That shift has increased the likelihood that Puerto Rico will default on securities sold by agencies including its highway, infrastructure and convention center authorities, Moody’s said in a report Wednesday. Assured and MBIA back some of those bonds.

“What’s going on with the Prepa bonds isn’t happening in a vacuum,” said Hampton, the Moody’s analyst. “It’s quite possible that the failure to resolve the Prepa negotiations, to carry them through to completion, could create significant challenges for all the other obligations.”

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