By Aaron Kuriloff
The Puerto Rico Electric Power Authority and its creditors were
close to a deal Tuesday that would allow the cash-strapped utility
to pay more than $400 million to bondholders, said people familiar
with the matter, potentially staving off what investors feared
might be the first default of many from the U.S. commonwealth.
A deal would mark the latest extension to restructuring talks
between the cash-strapped authority and its creditors. The
potential deal includes an arrangement to help the publicly owned
power monopoly make its full payment due to bondholders, the people
said. The authority, known as Prepa, has about $9 billion in debt
outstanding and has been negotiating a restructuring plan for
months with creditors that include bondholders, banks and bond
insurers.
The people emphasized no deal had been finalized, with a payment
deadline looming Wednesday.
Analysts had said Prepa didn't have the money to make the
payment, and investors worried a default by the authority would
presage others from the commonwealth, which has about $72 billion
in debt outstanding, a greater sum per capita than any U.S. state.
Analysts have also said the central government may run out of cash
within a month, which could lead to a government shutdown, employee
furloughs and other emergency measures.
Many investors stand to lose money from the commonwealth's woes,
ranging from individual mutual-fund investors attracted to Puerto
Rican bonds' tax-free status to hedge funds that last year bought
more than half of the island's sale of $3.5 billion in junk-rated
debt.
Prepa's creditors include mutual funds managed by
OppenheimerFunds Inc. and Franklin Templeton Investments, along
with bond insurers and a consortium led by Scotiabank. The
creditors have extended numerous deadlines.
In a typical distressed situation, a missed payment can enable
creditors of, say, a company, to push it into bankruptcy court. But
the bankruptcy code stipulates Puerto Rican entities such as Prepa
can't access chapter 9 protections available to municipalities and
U.S. state-affiliated authorities. Rather, creditors would likely
sue for payment, says Robert Donahue, managing director at the
Concord, Mass.-based research firm Municipal Market Analytics.
"That's potentially a more contentious situation" than
negotiations, he said.
A deal would come after Puerto Rico Gov. Alejandro Garcia
Padilla earlier this week issued a call for debt restructuring,
including losses for bondholders, that sent prices on the island's
bonds to record lows. Prices of some Puerto Rico bonds touched 64
cents on the dollar Tuesday, according to the Electronic Municipal
Market Access website, down from about 77 cents last week.
The governor's announcement also put renewed focus on insurers
who back billions of dollars in Puerto Rico bonds. The stock prices
of two of the biggest bond insurers, Assured Guaranty Ltd. and MBIA
Inc., have fallen 12% and 28%, respectively, this week. Despite the
concerns, Standard & Poor's Ratings Services on Monday left
unchanged the double-A ratings on Assured's subsidiaries and the
double-A-minus rating on National Public Finance Guarantee Corp., a
subsidiary of MBIA.
An Assured spokesman highlighted the company's $12 billion in
claims-paying resources, and an MBIA spokesman said it would
"ensure that its policyholders will continue to receive all" bond
payments.
Puerto Rico's release Monday of a report by former International
Monetary Fund officials highlighted the breadth of creditor
exposure. Moody's Investors Service said Tuesday the statements
from the government "reinforce our view that Puerto Rico is moving
quickly towards a consolidated debt restructuring that may entail
substantial losses on most of its debt."
Standard & Poor's on Monday dropped the commonwealth's
rating further into junk territory, pushing its credit to CCC-, the
same as Greece, and saying "a default, distressed exchange or
redemption of the commonwealth's debt appears to be inevitable
within the next six months." Fitch Ratings also downgraded the
island.
Even with Prepa's potential payment, "it's kind of like looking
for nickels and quarters in your couch," said David Litvack, head
of tax-exempt fixed-income research at U.S. Trust.
Prepa's talks with creditors have featured competing views on
ways to strengthen the authority. Prepa has proposed a
restructuring plan that calls for about $2.3 billion in capital
investment, which would involve a competitive bidding process for
third parties to build and operate new generating plants. Creditors
have proposed a $2 billion plan to revamp Prepa, saying it would
provide the agency with liquidity while replacing its antiquated,
oil-burning generators with natural-gas facilities.
Separately, a consortium of NRG Energy Inc., ITC Holdings Corp.
and York Capital Management also is proposing a $3.5 billion plan
to modernize Prepa. That would include building new natural-gas
facilities and transmission lines and selling power to Prepa,
saving the authority money.
Mike Cherney
contributed to this article
Write to Aaron Kuriloff at aaron.kuriloff@wsj.com