Puerto Rico's public power monopoly will file for bankruptcy, the island's federal financial supervisors ordered Friday, a move they said would help advance a massive privatization effort to lower power costs.
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The federal board overseeing Puerto Rico's financial rehabilitation voted to place the electric utility known as Prepa under court protection to adjust its $9 billion in debt. The move was widely telegraphed after the seven board members voted 4-3 earlier this week to reject a proposed debt restructuring agreement, as first reported by The Wall Street Journal.
Friday's vote to initiate the bankruptcy was unanimous.
Creditors of the Puerto Rico Electric Power Authority mounted a last-ditch campaign this week to keep the utility out of bankruptcy, filing litigation against the oversight board to preserve the proposed settlement and offering a $450 million emergency loan.
"We are in ongoing negotiations with creditors" that could affect when the bankruptcy petition is filed, said the oversight board's executive director Natalie Jaresko.
In rejecting the proposed deal, the four board members who voted it down said it would impede efforts to shift Prepa from a government monopoly to a regulated private utility through privatization of the island's outdated and inefficient power plants.
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Creditors have argued that restructuring the utility's debts would pave the way for privatization by boosting Prepa's creditworthiness.
A federal rescue package enacted by Congress last year empowers the oversight board to write down Puerto Rico bonds either consensually through negotiated deals or nonconsensually with the help of the courts. 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 revenue.
Prepa, one of the largest U.S. utilities, is a flashpoint in the territory's financial crisis. The oversight board has been searching for ways to bring down power rates that fluctuate based largely on commodity prices.
Bondholders had agreed to accept a 15% reduction in their claims in exchange for new debt paid from a special charge on utility ratepayers. The proposed customer surcharge was politically unpopular in Puerto Rico, where costly and unreliable power service remains a drag on economic growth and quality of life.
A massive blackout last year, later blamed on a fire, plunged huge swaths of the island of more than 3 million U.S. citizens into darkness for three days.
Prepa's expected bankruptcy presents another challenge for bondholders and for financial guarantors Assured Guaranty Ltd. and MBIA Inc.'s National Public Finance Guarantee Corp., which insure a combined $2.2 billion in utility debt. Creditors are scheduled to receive roughly $450 million from Prepa on Monday, a payment they are virtually certain not to receive.
Utility bonds have eroded in value since April, when creditors revised their terms at the request of Gov. Ricardo Rosselló, who had sought additional debt relief to ameliorate the planned consumer rate increases.
He said this week he would re-evaluate the future of Prepa, long a source of popular discontent and public corruption in Puerto Rico. The bond insurers, meanwhile, are asking for a court order compelling the oversight board to approve their settlement deal.
Write to Andrew Scurria at Andrew.Scurria@wsj.com
(END) Dow Jones Newswires
June 30, 2017 11:46 ET (15:46 GMT)