Puerto Rico Utility Negotiating as Deadline Lapses on Debt Dealby
Prepa and creditors haven’t extended bond-purchase deal
Utility owes investors and lenders $1.13 billion on July 1
Puerto Rico’s government-run power provider is negotiating with creditors after a deadline lapsed in its bond-restructuring agreement, putting at risk the utility’s plan to reduce its $9 billion of debt.
The Puerto Rico Electric Power Authority, called Prepa, hasn’t extended an agreement that expired Thursday and called for bondholders and insurance companies to buy $111 million of new three-year bonds. The contract, part of the utility’s larger restructuring plan, lapsed because creditors are reluctant to lend Prepa money after Governor Alejandro Garcia Padilla signed a law allowing him to skip principal and interest payments on the island’s debts -- including Prepa’s -- to avoid cutting back on essential government services.
The expiration may prove temporary because Prepa has previously announced deal extensions within days of missing deadlines.
“Prepa is continuing productive discussions with its creditors regarding the anticipated closing of the $111 million bond purchase under the restructuring support agreement,” the utility said in a statement Friday.
If the utility fails to reach a deal, it could jeopardize what would be the largest restructuring ever in the $3.7 trillion municipal-bond market and Puerto Rico’s first step toward persuading investors to cut the island’s $70 billion debt. Hedge funds, insurers and mutual funds have been working with Prepa since August 2014 on a way to reduce what it owes, after the utility breached its bond agreements by drawing on reserve funds to pay for fuel.
Prepa says the island has satisfied two key conditions that bondholders, MBIA Inc. and Assured Guaranty Ltd. insisted it must meet before they would buy the bonds.
Creditors are reticent to close the deal because Puerto Rico’s Senate has failed to vote on a House bill that would provide Prepa with an exemption from the debt-moratorium law. The governor used that law when the Government Development Bank on May 2 defaulted on $370 million, the largest such payment failure to date for the island.
Without the bond-purchase agreement in place, the debt-restructuring deal was set to expire. Prepa, hedge funds, bond-insurers and mutual funds reached that accord in December. Prepa faces a $1.13 billion payment to investors and lenders on July 1 that it won’t be able to pay unless the restructuring plan goes through.
The bond-purchase agreement allowed Prepa to avoid defaulting on a $196 million interest payment in January, with the creditors agreeing to buy the new bonds later. The bonds would carry a 10 percent coupon and mature July 2019. A group of bondholders would buy as much as $65 million of the bonds and MBIA and Assured would purchase about $50 million, according to the debt-restructuring accord.
The sale was contingent upon Puerto Rico lawmakers passing legislation to give Prepa the authority to execute the restructuring deal and the utility filing a proposed customer surcharge with the island’s energy commission, both of which have happened.
The obligation of creditors to buy the bonds, however, is subject to several conditions, according to a Jan. 28 update to Prepa’s restructuring deal. One is that no Puerto Rico statute enacted after the deal was cut affects bondholders’ ability to receive what they’re owed.
The restructuring plan would reduce Prepa’s debt by $600 million and offer debt-service relief for five years of more than $700 million. Bondholders would take a 15 percent loss on their securities in return for securities repaid with a new customer fee, called a securitization charge. The island’s energy commission is reviewing that proposed fee.