Puerto Rico's Sole Deal With Bondholders in Jeopardy

The sole tentative debt restructuring deal that Puerto Rico reached after two years of negotiations is in jeopardy after federal control board officials said they would support the U.S. territory's push to amend the agreement.

Many believe changes to the deal could mean a deeper cut for investors who bought bonds issued by the island's troubled public power company, which has a total debt of $9 billion.

Gov. Ricardo Rossello told a U.S. congressional hearing that the deal made by the previous administration did not call for significant concessions from certain creditors and might affect the utility's ability to update its aging infrastructure and offer more affordable rates, among other things.

"The goal is to be able to deliver reliable energy at sustainable rates to the people and businesses of Puerto Rico," he said. "That vision includes a successful restructuring of" the power company.

Members of a federal control board that oversees the Puerto Rican government's finances said they would back changes made to the 15-month-old deal, which expires March 31. Rossello requested the deadline be extended to May 1, the same day an overall stay on lawsuits filed by creditors is to expire amid multimillion-dollar defaults by Puerto Rico's government.

Rossello's comments sparked concern among bondholders who already agreed to a 15 percent cut, among other things. Stephen Spencer, with the Los Angeles-based investment bank Houlihan Lokey, an adviser to bondholders, said he was concerned about the deal falling apart.

"The government wants to jam us into pay-nothing bonds," he said. "Without a deal, [the power company] faces either a liquidity crisis or a large, immediate rate hike."

Power bills in Puerto Rico are already on average twice those of the U.S. mainland, which has long spooked potential investors and led to a growing number of unpaid bills on an island whose political leaders are seeking to restructure some $70 billion in public debt.

Others echoed the governor's message, including the Association of Industries of Puerto Rico.

The debt agreement "is a punitive proposal for power customers who will have to pay higher rates under a deal that preserves the power company's monopoly while blocking competition from the private sector and alternative energy," it said.

If the current deal is upheld, bondholders who bought the utility's debt would likely face fewer losses than those who bought bonds issued by other Puerto Rico government agencies. Rossello told U.S. legislators that he prefers to try to reach a new deal with the power company's bondholders before opting for a restructuring process similar to bankruptcy.

Danica Coto
Puerto Rico's Sole Deal With Bondholders in Jeopardy