Puerto Rico Power Authority effectively files for bankruptcy
Puerto Rico’s ailing power company has defaulted on its deal to restructure around $ 9 billion in bond debt and has sought court protection from its creditors, the government said on Sunday.
The government said the decision to file for bankruptcy was the only way to reduce the existing debt of the Puerto Rico Electric Power Authority “At a sustainable level”. The utility, known as Prepa, had previously negotiated an out-of-court settlement to cut its bond payments by around 15%. Bondholders now appear likely to suffer larger losses under judicial supervision.
Puerto Rico’s tax agency and financial advisory authority, which announced the decision, said they did not expect any service disruption for Prepa’s residential or business customers on the island.
Bondholders had hoped that Prepa’s debt could be reduced consensually, as planned. Some have questioned the legality of going to Federal Court to redo the case.
Bill Fallon, chief executive of the National Public Finance Guarantee Corporation, a bond insurer, called the move “inappropriate” and warned that it “would give Prepa years to attract the private investment needed to modernize” .
Electricity has long been a drag on the island’s economy. Prepa’s dilapidated power plants burn imported oil to generate electricity. Efforts to modernize factories and switch to clean, renewable fuels have been repeatedly delayed. Customers pay rates that follow rising and falling oil prices, and although rates are relatively low at the moment, they are likely to rise again.
In addition, there are long-standing accusations that Prepa’s fuel buying office for many years bought dirty petroleum sludge as fuel, made consumers pay the much higher price for cleaner distillates, and then created a slush fund with the difference. The Puerto Rican Senate held a series of hearings into Prepa’s fuel purchase irregularities and forwarded its findings to the Federal Bureau of Investigation.
Prepa had serious financial problems before the rest of the Puerto Rican government, when he was unable to pay for fuel in 2014. His creditors granted a fuel purchase credit that year and then negotiated an agreement to restructure about $ 5.7 billion of Prepa’s $ 9 billion. in total debt.
The deal was touted as a model at the time because it was done without the kind of leverage that can be exercised in bankruptcy. In addition to suffering a 15% loss, bondholders had agreed that Prepa could devote some of the savings to its long-promised modernization and conversion to cleaner energy sources.
But the deal also provided for Prepa to continue to pay off its remaining debt by adding an unpopular rise in monthly electricity customers’ bills. It also required that the restructured debt be secured by an investment grade rating, an insurmountable challenge with the island’s central government itself bankrupt and its painfully declining economy.
Last week, the federal watchdog that guides Puerto Rico’s finances voted to allow Prepa to seek debt relief under Promesa’s Title III, which is similar to Chapter 9 municipal bankruptcy. Natalie Jaresko, executive director of the board, said at the time the talks could continue, and the utility’s bondholders said they still hoped to pursue the consensual deal. They also offered to cover an interest payment of $ 170 million that Prepa was required to make to bondholders on Saturday.
But Prepa declined the offer, defaulting on payment and paving the way for the move on Sunday for court protection.