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