A $9 billion restructuring deal covering Puerto Rico's public power monopoly failed to win approval on Tuesday from the island's federal oversight officials, raising the likelihood of default at one of the largest U.S. utilities.
The federal board overseeing Puerto Rico's finances rejected the proposed settlement in a 4-3 vote, capping weeks of doubt about its viability.
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The decision marks a setback for creditors who have grown increasingly mistrustful of the oversight board and moves the electric utility known as Prepa one step closer to entering a court-supervised bankruptcy proceeding. The debt agreement, three years in the making, had run into resistance among the seven board members, four of whom were nominated by Republicans in Congress and were expected to be relatively creditor-friendly.
Tuesday's vote "closes the door on this request for debt restructuring" and makes a bankruptcy filing "the most likely course of action under the circumstances," the oversight board said in a statement.
In rejecting the deal, the four members voting no said they wanted to shift Prepa from a government monopoly to a regulated private utility by privatizing the island's power generation. Private investors "will not involve themselves with Prepa" under the proposed restructuring terms, they said.
Two insurers of utility bonds sued the oversight board late Monday in a last-ditch effort to preserve the deal, but the odds of avoiding a court-supervised proceeding are dwindling given that creditors are owed a $450 million payment on July 1.
The vote is sure to rankle Republicans in Congress who had urged the oversight board to approve the agreement as a road map for consensual settlements of Puerto Rico's other bonds. But criticism of the proposal had been growing in Puerto Rico, where residents pay higher rates than in any U.S. state but Hawaii.
Bondholders had agreed to accept a 15% haircut -- a reduction on their claims -- in exchange for new debt with stronger legal protections. Paying for the deal required a new charge on ratepayers that local manufacturers said could stifle economic growth and crowd out private generation projects. Creditors argued that restructuring the debt would boost Prepa's creditworthiness and attract the private investment capital to upgrade plants and lower costs.
Costly, unreliable utility service remains a drag on family incomes and qualify of life in Puerto Rico. A massive blackout last year, later blamed on a fire, left Prepa customers without power for three days. The federal rescue law passed last year empowers the oversight board to write down Puerto Rico's $73 billion in bonds either through negotiated deals or with the help of the courts.
The value of Prepa's bonds has eroded since April, when creditors revised their restructuring terms at the request of Puerto Rico Gov. Ricardo Rossellò, who obtained additional debt relief to mitigate the politically unpopular rate increases. A Prepa default would mean a financial hit for Assured Guaranty Corp. and MBIA Inc.'s National Public Finance Guarantee Corp., which guarantee a combined $2.2 billion in utility debt.
Write to Andrew Scurria at Andrew.Scurria@wsj.com
(END) Dow Jones Newswires
June 28, 2017 09:55 ET (13:55 GMT)