The Puerto Rico Electric Power Authority paid all principal and interest due to bondholders on Wednesday, buying the troubled utility time as it works to reach a deal with creditors.
The authority, also known as Prepa, said in a news release that it is funding the $415 million payment with about $153 million from its general fund and the rest from its debt-service reserves. Insurers that protect some of Prepa’s bonds agreed to buy $128 million in new short-term debt due by mid-December.
“We are pleased we were able to reach an agreement that allowed us to make the payment to our bondholders today and avoid a default,” saidLisa Donahue, Prepa’s chief restructuring officer. “As a result of these agreements, we have preserved our cash position.”
Puerto Rico itself also made a $645 million payment on some general-obligation bonds, according to a government spokeswoman. These bonds are backed by the commonwealth’s taxing powers.
Prepa also agreed with creditors—which include bondholders, banks and bond insurers—to extend restructuring talks through mid-September, the authority said. A bondholders’ group said in a news release they would continue to work with Prepa to reach a long-term plan. In addition to negotiations about Prepa’s $9 billion in debt, the talks also involve plans to modernize the utility’s operations.
Stephen Spencer, a managing director at investment bank Houlihan Lokey who is a financial adviser to the bondholders’ group, said in a news release that while there is an opportunity to reach an agreement by September, both sides must be willing to compromise.
It is possible that talks could break off and “appropriate legal action taken if there are unforeseen deteriorations in either the negotiations with Prepa or a broader decision made by Puerto Rico as a whole to treat bondholders unnecessarily unfairly during this process,” he said.
The payment comes after Puerto Rico Gov. Alejandro García Padilla said in a televised address Monday that the island’s debts were unpayable and called for concessions from bondholders. Analysts have said the commonwealth’s government could run out of cash within a month, which could lead to a government shutdown, employee furloughs and other emergency measures.
Investors and analysts had feared a default by Prepa could be the first of many from the commonwealth, which has about $72 billion outstanding and is struggling with high unemployment and a declining population. Instead, the utility bought time needed to work out an agreement that some investors hope could be a model for restructuring other Puerto Rico agencies.
Many investors stand to lose money from the commonwealth’s economic woes, ranging from individual mutual-fund investors attracted to the tax-free status of Puerto Rico bonds to hedge funds that last year bought more than half of the island’s sale of $3.5 billion in junk-rated debt.
Some bonds from that sale traded at around 69 cents on the dollar Wednesday, after touching a record low of 64 cents Tuesday, according to the Electronic Municipal Market Access website.
Richard Larkin, director of credit analysis at the investment firm Herbert J. Sims & Co., said he had expected that Puerto Rico and several agencies would make Wednesday’s payments, but after that, “it’s a crapshoot.” He thinks a broad restructuring of Puerto Rico debt can still be avoided if the commonwealth speeds its budget process, creates a five-year plan for growth and improves transparency.
Several investors said saber-rattling at creditors won’t help Puerto Rico.
“Every one of these solutions requires some recalibration of government offerings and services,” said Laurence Gottlieb, chairman and chief executive of Fundamental Advisors LP, a private-equity and hedge-fund manager that owns Puerto Rico debt.
Prepa on Wednesday paid $415 million to bondholders, and restructuring talks that have been extended to mid-September will also include plans to modernize operations. PHOTO:ALVIN BAEZ-HERNANDEZ/REUTERSBy Aaron Kuriloff
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