Puerto Rico’s federal oversight board voted unanimously to allow for the government’s electric utility to file for bankruptcy after rejecting a longstanding debt-restructuring agreement with creditors, threatening to impose steep losses on bondholders and insurance companies.
The decision promises to upend years of negotiations by the Puerto Rico Electric Power Authority, known as Prepa, with hedge funds, mutual funds and bond-insurance companies to find an out-of-court solution to reduce the utility’s obligations and modernize its system.
Governor Ricardo Rossello said he asked the U.S. territory’s financial oversight board to allow it to push the talks into court. The announcement follows the decision by the board to reject a pact that the power company first struck with creditors in late 2015, saying it failed to protect residents from the risk of burdensome electricity bills that could delay the island’s economic turnaround. No bankruptcy filing has yet been made and officials said they want to continue negotiations.
“Notwithstanding the authorization of this filing, the board will continue to work towards a prompt, negotiated settlement with PREPA’s creditors — an approach that we believe is in the best interest of all of PREPA’s stakeholders,” Jose Carrion, the chairman of the U.S. board, said in a statement. “To this end, our dialogue with creditors is ongoing.”
The board’s move casts doubt on whether Prepa will pay investors $423 million of principal and interest due July 3. Gerardo Portela, executive director of Puerto Rico’s Fiscal Agency and Financial Advisory Authority, told reporters after the board meeting that he didn’t know if Prepa would make the payment. It would be the first payment default for the agency because bondholders and insurance companies had been extending short-term loans to avoid such a lapse.
A Prepa spokesman referred questions about the July payment to Puerto Rico’s fiscal agency.
MBIA Inc.’s National Public Finance Guarantee Corp. and Assured Guaranty Ltd., which insure Prepa bonds, sued the oversight board this week in an effort to salvage the agreement, saying it would save the utility from lengthy bankruptcy proceedings.
Ashweeta Durani, a spokeswoman for Assured Guaranty, declined to comment beyond the company’s statement Thursday criticizing the board for rejecting the deal. In a statement, Bill Fallon, the chief executive officer of MBIA’s National, said the board’s decision was “ill-advised, improper, and could well have dire consequences for Puerto Rico.”
An group of bondholders said it is open to continuing talks to help restructure the utility. “We remain committed to continue negotiations and find a solution to move forward together to revitalize Prepa,” the group said in a statement.
The power company’s bonds tumbled over the past two months on speculation that the deal would unravel and leave investors recovering less than the 85 cents on the dollar they agreed to accept. The key terms were agreed to before U.S. emergency rescue legislation was enacted that extended the territory power to file for a tailor-made type of bankruptcy, known as Title III, giving it far greater leverage with creditors.
Prepa bonds maturing July 1, 2017 traded Friday at an average 60 cents on the dollar, down from 77.8 cents the day before, data compiled by Bloomberg show.
Prepa is the largest U.S. public power utility by customers and revenue. Officials have sought to reduce the system’s reliance on oil to help lower electricity rates for residents and business, a key component to help turnaround an economy that’s shrunk in the past decade. The island has struggled with widespread blackouts. Former Governor Alejandro Garcia Padilla announced a state of emergency in September 2016 when a power-plant fire left 1.5 million customers in the dark
Puerto Rico last month filed for court proceedings to cut the major portions of the government’s $74 billion debt. The island said it wants to continue to negotiate with the utility’s bondholders.
“We reiterate our desire to continue good faith negotiations with the Prepa creditors with the hope of achieving consensual negotiations in an orderly process in the Title III,” the administration said Friday.