By Aaron Kuriloff
Puerto Rico's cash-strapped electric power authority faces a key
deadline on Thursday to extend lines of credit with banks or face a
possible restructuring of about $9 billion in total debt.
Extensions of the loans would help the Puerto Rico Electric
Power Authority overcome a short term cash crunch and avoid more
uncertainty about its future, which is roiling the market for
Puerto Rico bonds.
The authority last month reached deals with Citigroup Inc. unit
Citibank and banks led by Scotiabank de Puerto Rico, a unit of Bank
of Nova Scotia, to delay some payments on $671 million it owed the
banks between July and mid-August. It was the second agreement to
postpone payments.
The power authority, known as Prepa, said in a statement that it
is prohibited by nondisclosure agreements from providing details on
talks with its lenders, bondholders and bond insurers.
"These discussions are fluid and ongoing and have not reached a
point where there is anything specific to report," the statement
said.
Representatives of Citigroup and Bank of Nova Scotia declined to
comment.
The power authority, known as Prepa, is at the forefront of
Puerto Rico's long-running financial difficulties. The utility is
seeking to find cash to fund operations and make payments to
lenders as the island broadly struggles with steep unemployment and
a weak economy.
The power authority owes $146 million to Citigroup and $525
million to the syndicate led by Scotiabank on a credit line that
matures Thursday, Standard & Poor's Ratings Services said in a
report last month cutting the utility's bonds further into junk
territory. The agency has already dipped into rainy-day cash to
cover its debts, tapping a reserve fund for $41.6 million to make a
July payment to bondholders.
"Obviously, they're running out of time," said Peter Hayes, head
of municipal bonds at New York-based BlackRock Inc. "They have a
solvency issue. And if they get extended or find some other type of
private financing, it's going to be very expensive for an entity
that's already financially troubled."
Puerto Rico lawmakers in June approved legislation allowing some
public agencies, including the island's power, water and
transportation authorities, to overhaul their finances. Those three
owe a combined $19.4 billion, according to estimates from Barclays
PLC. The law doesn't apply to Puerto Rico's general obligation or
sales-tax debt.
Prepa's ongoing liquidity problem suggests a growing possibility
the agency will restructure its debt under the law, S&P said.
Mutual funds managed by Franklin Templeton Investments and
OppenheimerFunds Inc. have challenged the law's constitutionality
in court, and said in a filing this week that Prepa can meet its
obligations without restructuring.
Puerto Rico has about $73 billion in total debt, which is widely
held by mutual funds and individuals, and some analysts worry its
troubles could cause losses for investors nationwide. The price of
some bonds from the power authority fell as low as about 37 cents
on the dollar after the island's legislators passed the
restructuring law, and some this week were trading at about 49.5
cents on the dollar. The S&P Municipal Bond Puerto Rico Index
is down about 0.54% this quarter.
John Miller, co-head of fixed income at Nuveen Asset Management
LLC, which oversees about $90 billion in municipal bonds, said that
that while Puerto Rico's woes haven't affected the overall market,
the problems could spread beyond the power authority to the
island's other debt.
"We're still looking at the economy's fundamentals, which are
flat with some declines," he said. "Without an economic recovery,
the restructuring of these three entities is just the
beginning."
Overhauling the island's public corporations has become a
priority for the administration of Gov. Alejandro Garcia Padilla as
it tries to jump-start the economy, eliminate budget deficits and
reassure investors that the U.S. commonwealth's fiscal position is
improving.
A report by the Federal Reserve Bank of New York last month
recommended strengthening the performance of the island's large,
heavily-indebted public corporations. "For any financial reform
agenda to be successful, it must confront this issue head-on," the
report said.
Write to Aaron Kuriloff at aaron.kuriloff@wsj.com
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