A deal to restructure $9 billion of Puerto Rico electric debt fell apart as a federal control board rejected the accord Tuesday, pushing the island’s main power utility closer to a potential bankruptcy.
A federal oversight panel tasked with fixing the commonwealth’s $74 billion debt crisis shot down in executive session the plan to reduce Puerto Rico Electric Power Authority’s obligations. PREPA, as the utility’s known, and its creditors struck the deal 18 months ago, before Congress created the oversight board last year.
“It’s pretty negative from the perspective that you have an agreement and it’s been out there for a long time," said Daniel Solender, head of municipals at Lord Abbett & Co., which manages $19 billion of state and local debt, including Puerto Rico bonds. "It makes it hard to proceed going forward with them if agreements don’t hold up.”
The restructuring of PREPA, the largest U.S. public power utility by customers and revenue, will likely happen using a form of bankruptcy called Title III, the board said. Puerto Rico fell into bankruptcy on May 3 after negotiations with its creditors failed. PREPA’s deal would have helped the utility avoid defaulting on a $423 million principal and interest payment due July 1. It would be the first missed debt payment for the agency after it negotiated for nearly four years with hedge funds, mutual funds and bond-insurance companies to find an out-of-court solution.
Board members have questioned the deal’s ability to lower electricity rates and sufficiently modernize the system.
“Affordable and reliable electricity is central to Puerto Rico’s economic turnaround, without which customers will seek alternative measures to satisfy their needs resulting in increased pressure to increase the rates to the remaining customer base, thereby inhibiting growth and long-term viability,” the board said in a statement Tuesday.
The board voted four to three against the deal, according to a person familiar with the vote who asked not to be named because the meeting wasn’t public.
The vote comes after MBIA Inc.’s National Public Finance Guarantee Corp. and units of Assured Guaranty Ltd. sued the board Monday in U.S. court in Puerto Rico, seeking to prevent the panel from blocking PREPA’s restructuring agreement.
The parties first reached the deal in December 2015 after nearly a year of negotiations. It was revised in April. It involved investors taking a 15-cent loss on their securities and waiting longer to get repaid.
Congress last year passed legislation, known as PROMESA, that allows Puerto Rico and its agencies to file Title III to force creditors to take losses on their investments. The legislation included language that directed the board to approve any already-crafted creditor agreement. U.S. Representative Rob Bishop, chairman of the Natural Resources Committee, which drafted PROMESA, earlier this month urged the board in a letter to approve Prepa’s restructuring deal.
PREPA bonds have dropped in price in the past two months as investors questioned whether the board would approve the plan. Utility debt maturing in 2032 traded Tuesday at an average 53.2 cents on the dollar, down from 56.2 cents on Thursday.
