The financially troubled power company in Puerto Rico said Monday that it reached an agreement with lenders to delay payments on its lines of credit, giving it some breathing room as it seeks to avoid a default that spook bond markets.
Under the agreement, the publicly owned Puerto Rico Electric Power Authority says it may delay payments through July 31 while it continues talks with lenders and looks for a longer term solution to problems that include deep debt and an overreliance on expensive fuel and out-of-date infrastructure.
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"While PREPA faces certain financial challenges today, we are working hard to improve operations," Executive Director Juan Alicea Flores said, referring to the utility by its acronym in Spanish.
The utility has lines of credit totaling about $800 million with Citibank and Scotiabank and about $9 billion in outstanding debt, largely a result of years of borrowing to close deficits and meet expenses.
PREPA, along with the publicly owned water utility and the highway and transportation agency, gained the ability to restructure debt in a process similar to bankruptcy under legislation approved in June by the government of the U.S. island territory. The law, which is being challenged in court, spooked investors and prompted downgrades of Puerto Rico debt.
The move to delay payments on the line of credit was expected. "It at least gives PREPA time to get its ducks in a row for a possible restructuring under the new law or the opportunity to organize meetings with bondholders to discuss a restructuring," said David Tawil, co-founder and portfolio manager of New York-based Maglan Capital.
PREPA's troubles are part of the broader economic problems in Puerto Rico, which is struggling with the combined effects of a shrinking economy and massive outstanding debt. The prices of Puerto Rico's widely held general obligation bonds have fallen sharply over the past year as investors worry about the island's ability to repay its long-term debt.
Collectively, the three publicly owned utilities account for about 40 percent of Puerto Rico's outstanding debt of more than $70 billion. The law granting the legal authority to restructure does not apply to the general obligation bonds, which have long been a widely held investment in the United States.