- Bondholders grant another day in restructuring negotiations
- Insurers remain main holdout from consensual agreement
Puerto Rico’s main electric utility gained more time to negotiate with insurance companies on how to restructure $8.2 billion of debt as the agency faces a $196 million interest payment due Jan. 1.
Investors holding about 35 percent of Puerto Rico Electric Power Authority bonds and fuel-line lenders agreed to extend through Friday to a restructuring agreement the parties initially signed in November and was set to expire Thursday, according to a statement from the agency. This is the fourth extension. It gives Prepa, as the utility is known, more time to forge an accord with insurance companies that guarantee repayment on about $2.5 billion of its debt. Any final deal needs legislative approval.
Bondholders are willing to give Prepa more time even after a tentative agreement between the utility and the insurers fell apart last month. Prepa on Jan. 1 must repay a combined $128 million to Assured Guaranty Ltd. and MBIA Inc.’s National Public Finance Guarantee Corp. It also has a $196 million interest payment due to bondholders on that date. The utility has enough cash on hand to make that interest payment, Moody’s Investors Service said in a Dec. 11 report.
The extension follows Governor Alejandro Garcia Padilla’s announcement Wednesday that Puerto Rico will default in January or May because the island’s government may not have enough cash to pay core services and debt payments. His administration started diverting revenue this month that backs certain agency debt to instead flow into the commonwealth’s coffers.
A Prepa restructuring would be the largest ever in the $3.7 trillion municipal-bond market. The U.S. Supreme Court on Dec. 4 said it would hear an appeal by the commonwealth to reinstate a local debt-restructuring law that would allow some island public corporations, including Prepa, to ask bondholders to take losses. Prepa, hedge funds, mutual funds, and insurers have been in talks since August 2014 on how to lower the utility’s obligations and modernize its plants.
U.S. Bank, a Prepa bond trustee, has approximately $24 million in a reserve account, according to a Dec. 7 event filing on the Municipal Securities Rulemaking Board’s website, called EMMA. Prepa had, as of Sept. 30, $252 million in deposits at the Government Development Bank for its reserve account, construction fund and operating account, according to a Nov. 6 financial filing.
Prepa’s restructuring support agreement with bondholders “contemplates that some or all of the January 1, 2016 interest payments would be paid with funding provided to the authority, but it remains premature to predict whether and to what extent that will occur,” according to the EMMA filing. “The trustee is currently not holding other funds in the sinking fund that will be available to pay interest on the bonds due on January 1, 2016.”
Under the restructuring support agreement with bondholders, investors would take losses of about 15 percent in a debt exchange.