Bond insurers are suing Puerto Rico's financial oversight board over a $9 billion utility debt restructuring agreement, accusing the U.S. territory's financial supervisors of improperly withholding approval of the controversial deal.
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Assured Guaranty Ltd. and MBIA Inc.'s National Public Finance Guarantee Corp. on Monday asked for a court order requiring the federal board overseeing Puerto Rico's finances to accept a financial settlement covering its cash-strapped power monopoly.
The lawsuit represents a last-ditch attempt to keep the public power monopoly known as Prepa out of bankruptcy. But the odds of salvaging the existing restructuring deal are thin given that Prepa owes a $453 million debt payment on July 1 to creditors who have grown increasingly mistrustful of the oversight board.
The debt agreement, three years in the making, has failed so far to gain sufficient support among the oversight board's seven voting members, leaving the agreement wobbling on the brink of collapse, The Wall Street Journal reported this month.
Members of Congress who wrote Puerto Rico's federal rescue package and control its relationship with the U.S. are divided on the merits of the deal. Republican Rep. Rob Bishop (Utah) said this month the board was powerless to disapprove the settlement, while Democrats Nydia Velazquez (N.Y.) and Raul Grijalva (Ariz.) said no creditor deal should be off-limits to board review.
The territorial government itself has already entered a court-supervised restructuring proceeding in San Juan, where creditors are battling to increase their share of government revenues.
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Prepa is a political flashpoint in the territory's financial rehabilitation due to unreliable energy service that drags down economic growth and costs consumers more than in every U.S. state but Hawaii. The oversight board has been searching for ways to bring down power rates that fluctuate based largely on commodity prices.
Together, National and Assured guarantee some $2.2 billion in Prepa bonds. Their lawsuit said that Puerto Rico "cannot afford to endure a Prepa bankruptcy that could turn the lights off."
The potential collapse of the utility deal comes at an inopportune moment for National, which was downgraded by S&P Global Ratings on Monday. Shares in parent MBIA rallied from $8.48 a share to $9 early Tuesday morning on speculation the ratings cut would cause it to seek a buyer for National.
Bonds issued by the Puerto Rico Electric Power Authority have lost value since April, when creditors revised their restructuring terms at the request of Puerto Rico Gov. Ricardo Rossello, who sought additional concessions to mitigate politically unpopular rate increases on consumers. Puerto Rico's rescue law empowered the oversight board to write down Puerto Rico bonds either consensually through negotiated settlements or nonconsensually with the help of the courts.
Bondholders under the deal would accept a 15% reduction on their claims in exchange for new debt paid from a special customer surcharge. Critics including local manufacturers say the deal would impose new costs on utility ratepayers that risk stifling economic growth and crowding out private generation projects. Meanwhile, creditors argue that reworking Prepa's debt will lower costs and bolster its creditworthiness, enticing investment capital to upgrade its outdated generation assets.
The oversight board unveiled a counteroffer this week that would further revise the proposed terms, according to a person familiar with the matter. There is no forbearance agreement to prevent an outright default if Prepa doesn't pay its creditors on July 1, this person said. The oversight board is scheduled to meet publicly in San Juan on Friday.
Write to Andrew Scurria at Andrew.Scurria@wsj.com
(END) Dow Jones Newswires
June 27, 2017 15:22 ET (19:22 GMT)