Puerto Rico's electric utility reached a tentative agreement with bond-insurance companies and some bondholders to restructure the utility's $8.2 billion of debt, according to two people with knowledge of the discussions.
The Puerto Rico Electric Power Authority, known as Prepa, reached a potential agreement with bond-insurance companies where the monolines will provide an equity component that will offer about $450 million in the event of a default, according to the people, who asked for anonymity because the negotiations are private. The tentative agreement sets into motion what would be the largest-ever restructuring in the $3.7 trillion municipal- bond market and potentially avert a default on $196 million of interest due Jan. 1.
Investors holding about 35 percent of Prepa 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 more time to finalize accord with insurance companies that guarantee repayment on about $2.5 billion of its debt. Any final deal needs legislative approval.
Jose Echevarria, a spokesman for Prepa in San Juan, and Dan Zacchei, a representative in New York at Sloane & Co. for Prepa bondholders, declined to comment on the tentative agreement.
The restructuring would be the first step in Puerto Rico's goal to reduce its $70 billion debt burden by asking bondholders to take a loss or agree to delay principal payments, and it may provide a framework for agreements with other creditors. It follows a stalled effort by the Obama administration to give the commonwealth broad bankruptcy powers to help the island improve its finances and revive an economy that's failed to grow since 2006. Congressional leaders rejected access to bankruptcy as part of a budget bill crafted this week.
The potential agreement 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.
The accord with the insurance companies is the final piece in a plan to ease Prepa's debt payments so the utility can invest in modernizing a system that uses crude oil to produce electricity. The utility last month finalized a September deal with investors holding 35 percent of its debt to take a 15 percent loss. It would give Prepa debt-service relief for five years of more than $700 million and permanent principal reduction of more than $600 million, according to the utility.
A compromise with bond insurers took longer to reach than with the bondholder group because many of those investors purchased the agency's securities at distressed levels and are willing to accept less than par. Insurers would be required to make up to investors whatever principal or interest the utility fails to pay on time and in full.
The deal still needs approval from Puerto Rico lawmakers. The bondholder pact stipulates that legislation authorizing the debt restructuring must be passed and that the debt exchange must be executed by June 30, 2016.
The utility is the largest U.S. public power provider, with 1.47 million customers and $4.68 billion in electric revenue in 2013, according to the American Public Power Association. The agency is weighed down by overdue bills from other government agencies and departments and residents. Most municipalities don't pay the utility for electricity and in return the agency doesn't pay property taxes, an arrangement that benefits the local communities more than it does Prepa.
