Saturday, January 23, 2016
SAN JUAN, P.R. — Negotiations to restructure roughly $9 billion of the debt of Puerto Rico’s power company collapsed late Friday, raising the prospect of the biggest default yet in Puerto Rico’s deepening debt crisis.
The creditors blamed the utility, the Puerto Rico Electric Power Authority, or Prepa, for scuttling the talks, saying Prepa officials had decided to let a critical expiration date pass without taking action. But Prepa said it was the creditors’ fault for trying to impose a requirement that Prepa had already rejected.
Prepa is one of the largest single issuers of Puerto Rico’s $72 billion in debt, most of it in the form of municipal bonds, which are widely held through mutual funds and other investment firms. It is a monopoly, owned by the residents of the island, and until 2014, it was self-regulated.
“They had no incentives whatsoever to be efficient,” the president of Puerto Rico’s Senate, Eduardo Bhatia, said of Prepa in a recent interview. “This is incredible. Our power plants look like the cars in Cuba.”
They run like old cars, too, and one goal of the restructuring was to provide money for a long-awaited modernization.
The creditors released a statement at midnight on Friday, as soon as the expiration date had passed, saying the hard-won deal was off. They did not say whether they would now declare Prepa in default. Doing so could have major repercussions.
In August, Puerto Rico missed a $58 million payment on what it called "moral obligation bonds," saying it did not have any legal obligation to make the scheduled payment on that type of debt. On Jan. 1, it defaulted on $163 million worth of payments to a low-ranking type of bond, in order to save cash to pay its highest ranking general obligation bonds. Insurers of the affected bonds have filed lawsuits, which in turn prompted Puerto Rico to intensify its pleas to take shelter in bankruptcy court, which would require an act of Congress.
Prepa does not take in enough cash to cover its costs, and it has a debt payment of about $400 million due to bondholders on July 1. It also owes about $700 million to two institutions that finance the shipments of fuel that Prepa burns to produce energy. The utility does not have the resources to make those payments.
In a recent congressional hearing, Prepa’s chief restructuring officer, Lisa J. Donahue of AlixPartners, said it “would, in my opinion, be a disaster” if Prepa failed to make those payments. She said its fuel shipments could then stop, and if it ran out of fuel to generate power, “blackouts across the island” would result. The government here has been desperately trying to court new investment and revive the island’s shrinking economy. Widespread blackouts could undo those efforts.
Prepa issued its own statement early Saturday, saying that even though its restructuring deal had “terminated,” it remained willing to pick up the pieces and try to get a new deal. It said the talks broke down because the creditors had said they were willing to roll back the expiration date from Friday to Feb. 12, but tried to impose new requirements in exchange. “Prepa had rejected these same conditions in December 2015,” the utility said in its statement.
The negotiations have been underway since 2014, when Prepa ran out of cash, precipitating a crisis, and creditors agreed to refrain from enforcing their claims. As part of their forbearance agreement, they allowed Prepa to dip into prepaid reserves to make bond payments, something that could otherwise be considered an event of default.
In September 2015, the parties reached a tentative debt-exchange agreement, in which a big group of creditors agreed to exchange their Prepa bonds for new bonds that had a face value of 15 percent less, a lower interest rate and other relief. The existing bonds were rated as junk, and the deal called for the new bonds to get investment-grade ratings, something that would require Prepa to seek the first increase since 1989 in the base rate it charges customers.
The Puerto Rico Legislature also needed to approve the deal. Some lawmakers said Prepa and its creditors were rushing to close the deal before the island’s new public utility commission — the first independent regulator in Prepa’s 75-year history — could properly review it.
The creditors expected the Legislature to approve the deal in December. When that did not happen, they said they would wait until Jan. 22. The creditors also offered to buy an additional $115 million of bonds from Prepa to help cover the cost of a debt-service payment that the utility made on Jan. 1.
But as the deadline loomed this week, lawmakers said they were still not ready to approve the agreement. One person familiar with the negotiations said the creditors were willing to wait until Feb. 12 for the enabling law, but tried to make the $115 million financing mechanism contingent on the new public-utility commission signing off on the increase in the base rate by then. The person, who spoke anonymously, said the commission could not work that quickly because it had not been set rates before and would probably need until May.
The Prepa creditors said they could not wait that long because, among other things, the Federal Reserve was nudging up interest rates, and the deal had a fixed interest rate that would soon fall behind. Their statement said, “It was our desire to be as supportive of the legislative process as possible,” and added that they found it “extremely disappointing and perplexing that Prepa has chosen to take this stance.”
The creditors said that they remained open to resuming talks.
Prepa’s statement quoted Ms. Donahue as being disappointed as well. “Prepa remains willing to continue discussions,” she said.