Puerto Rico’s struggling electric power authority reached a temporary deal with some of its lenders on Monday, buying the agency a little more time as it sorts out its troubled finances.
Banks providing credit lines are allowing the Puerto Rico Electric Power Authority to delay certain payments for three more weeks, the agency said on Monday.
The agreement forestalls a possible restructuring by the power authority, which supplies electricity to the island’s 3.6 million residents. The authority, which is known by its acronym Prepa, uses the credit lines to purchase oil to generate electricity.
“Over the next few weeks, Prepa will continue discussions with the lenders and will use this period to evaluate various alternatives to improve its financial situation,” the authority said in a statement.
The deal reflects the conundrum facing the power authority’s lenders. Prepa owes money on two main credit lines — a roughly $250 million line from Citigroup and a $550 million line from a syndicate of banks. If Citigroup and the other lenders force Prepa to pay immediately, it could hasten the authority’s path to restructuring and increase the likelihood of losses for the banks. Still, Prepa’s cash crisis cannot be fixed easily — which means a reckoning for its lenders may be inevitable.
A spokesman for Citigroup declined to comment. A spokeswoman for Scotiabank, which acts as the administrative agent for the bank syndicate, also declined to comment.
Prepa is seen as a likely test case for how Puerto Rico can solve its debt problems through a recently enacted restructuring law.
Electricity costs in Puerto Rico are roughly double those on the mainland United States, leaving little room for the authority to raise rates, because it relies largely on oil to power its generating plants. Attempts to convert to less-expensive natural gas have been slowed by environmental and political issues.
Prepa’s problems worsened last week when Moody’s Investors Service downgraded the authority’s credit rating deeper into junk territory. According to Moody’s, Prepa owes $146 million to Citigroup over the next two months. It’s not clear when the authority must repay the bank syndicate the outstanding balance on its $550 million credit line.
In a news release Monday, Prepa said its lenders “have agreed to not exercise remedies as a result of credit downgrades and other events,” adding that it can “delay certain payments currently due until July 31.”
The downgrade came after the adoption of a law late last month that allows some of the island’s public corporations to seek protection similar to what bankruptcy provides. Like states, Puerto Rico cannot file for Chapter 9 federal bankruptcy protection.
The so-called Recovery Act would allow public corporations to revamp debt and renegotiate labor contracts. It does not apply to general obligation bonds issued by the commonwealth.
Puerto Rico officials say they are trying to wean public corporations from the central government’s support by giving them a means to restructure their finances. But some investors fear that the government may renege on its longstanding constitutional pledge to pay back its own debts.
Investment funds, managed by Franklin Templeton Investments and OppenheimerFunds, have filed a lawsuit against the Puerto Rico government in federal court, arguing that only Congress can create bankruptcy laws.
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