Puerto Rico Power Authority Faces Crucial Deadline on Debt

A power station of Puerto Rico Electric Power Authority pictured in San Juan. The electricity provider faces a critical deadline on its credit lines on Thursday. Reuters
Puerto Rico's cash-strapped electric power authority is facing a critical deadline on Thursday to extend or make payments on lines of credit with banks or face a possible restructuring of about $9 billion in total debts.
Extensions of the loans would help the Puerto Rico Electric Power Authority overcome its short-term cash crunch and avoid more uncertainty about its future, which is roiling the market for Puerto Rico bonds.
The authority earlier this month reached deals with Citigroup Inc. C +1.17% unit Citibank and banks led by Scotiabank de Puerto Rico, a unit of Bank of Nova Scotia,BNS.T +0.69% to delay some payments on $671 million it owed the banks between July and mid-August. The power authority didn't have the money to pay, according to Standard & Poor's Ratings Services.
Representatives of Citigroup and Bank of Nova Scotia declined to comment.
The power authority, known as Prepa, said it "is involved in ongoing discussions with its creditors and suppliers in light of the current financial situation and evaluating ways to improve operations and strengthen service to its customers."
Prepa is at the forefront of Puerto Rico's long-running financial difficulties. The power provider is seeking to find cash to fund operations and to make payments to lenders, as the island broadly struggles to raise money in the markets or through its taxes amid steep unemployment and a weak economy. Puerto Rico has about $73 billion in total debt.
The power authority owes $525 million to the syndicate led by Scotiabank on its credit line that matures on Aug. 14. The agency already has dipped into rainy-day cash to cover its debts, as it tapped a reserve fund for $41.6 million to make a July payment to bondholders.
"Everyone's guessing, but the hope is the banks don't want to be the ones to throw this into chaos," said Daniel Solender, director of municipal-bond management at Lord Abbett & Co., which oversees about $15.5 billion in municipal-related holdings, including some from Puerto Rico.
Puerto Rican lawmakers in June approved legislation allowing some public agencies, including the island's power, water and transportation authorities, to overhaul their $19.4 billion of debt. The law doesn't apply to Puerto Rico's general-obligation or sales-tax debt.
"If Prepa is not able to renew the lines of credit or secure other liquidity, it may choose to restructure its debt, as allowed by the new law," S&P said in a research report.
The power authority's debt is widely held by mutual funds and individuals, and some analysts worry its troubles could cause losses for investors nationwide.
The price of bonds from the power authority fell to as low as about 37 cents on the dollarafter the island's legislators passed the restructuring law, and the bonds on Wednesday were trading at about 48 cents on the dollar. The S&P Municipal Bond Puerto Rico Index has dropped 1.48% this month.
An extension of the authority's loans, however, won't change Prepa's fundamental economic problems or those of Puerto Rico, said John Miller, co-head of fixed income at Nuveen Asset Management LLC, which manages about $90 billion in municipal bonds. Still, he says, the commonwealth's problems appear unlikely to spread off the island and infect the broader municipal-bond market, which has performed well despite Puerto Rico's difficulties.
Overhauling the island's public corporations has become a main focus for the administration of Gov. Alejandro Garcia Padilla as it tries to jump-start the economy, eliminate budget deficits and reassure investors that the U.S. commonwealth's fiscal position is improving.
William Dudley, president of the Federal Reserve Bank of New York, in a speech last month said large, indebted, corporate-like public entities account for almost 40% of the island's debt and any financial-overhaul effort "must confront this issue head on."
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Puerto Rico Power Authority Faces Crucial Deadline on Debt

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