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Puerto Rico’s Bankrupt Power Utility Heads Toward Litigation After Debt Talks End

·4-min read

(Bloomberg) -- Puerto Rico’s bankrupt power utility and bondholders may face off in court Wednesday in the wake of Hurricane Fiona’s damage after mediation talks over the agency’s $9 billion debt restructuring ended last week without a deal.

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US District Court Judge Laura Taylor Swain ordered a hearing for Wednesday on the commonwealth’s push to start litigation after months of court-supervised mediation failed to produce a debt-cutting plan for Puerto Rico’s Electric Power Authority, called Prepa. The island’s financial oversight board filed a potential litigation schedule late Friday even though it still wants to continue negotiations with creditors.

The breakdown in the debt talks comes as Puerto Rico slowly restores power after Hurricane Fiona grazed the island Sunday, dumping heavy amounts of rain and causing catastrophic flooding, according to the National Hurricane Center. The storm triggered an automatic shutdown at power plants that cut electricity to the entire island of 3.1 million people.

Puerto Rico Begins Restoring Power After Storm Snuffs Grid (2)

The court may choose to delay Wednesday’s hearing because of Hurricane Fiona and will assess the timing early this week, Swain wrote in a court filing Sunday morning.

Prepa’s restructuring hinges on how it can reduce its obligations sufficiently so that island residents -- 44% of whom live in poverty and suffer from chronic blackouts -- are able to repay while at the same time compensating creditors, some of whom haven’t been paid in eight years.

“The parties’ respective positions on what is reasonable in the context of Prepa’s rates and needs, and on their legal rights have resulted in a currently unbridgeable gap on the economic terms of a restructuring,” lawyers for the oversight board wrote in their filing late Friday.

Puerto Rico Power Utility Risks Litigation; Debt Talks Fail (1)

Litigation will prolong a five-year bankruptcy that’s already been set back by earlier hurricanes, the commonwealth’s own bankruptcy and the pandemic. Resolving Prepa’s finances and strengthening its power grid are crucial in providing reliable electricity and boosting Puerto Rico’s economy.

Prepa began skipping principal and interest payments in 2017 when its bankruptcy began. In the two years before then, the utility was only able to make such payments because certain creditors and bond insurance companies extended loans.

In response to the board’s litigation request, a group of ad hoc bondholders and bond insurers early Monday asked Swain to end Prepa’s bankruptcy or appoint a receiver that would raise electricity rates to cover the utility’s operating and debt costs, according to court documents.

If Swain declines to allow a receiver for Prepa, the bondholders and insurers want the court to impose a Nov. 1 deadline for the board to file a debt restructuring plan, with a confirmation hearing to be held no later than May 1.

“Prepa largely continues to do business as usual -- declining to charge its customers an amount sufficient to pay the debt service that it is contractually obligated to pay, not collecting from government entities that are years overdue on their bills, failing to move forward with putting FEMA funds to work, and faltering on improving its historically abysmal operational track record,” lawyers for the creditors wrote in Monday’s filing to the court.

A key disagreement in the negotiations is whether Prepa’s bonds are backed by the utility’s gross revenue or repayment is secured only through a so-called sinking fund held by the bond trustee, according to court documents. Bondholders believe they are entitled to Prepa’s gross revenue.

Under the board’s proposed schedule, hearings for a summary judgment could be held as soon as January or as late as April.

Prepa is the island’s main supplier of electricity and, with about 1.5 million customers, is one of the biggest public power utilities in the US. It’s been negotiating with bondholders and insurance companies since 2014 on how to reduce its obligations.

Governor Pedro Pierluisi in March terminated a prior restructuring deal, first struck in 2018 with a bondholder group. Insurance companies added their support in 2019. That debt plan had failed to gain legislative approval.

(Updates with bondholder response in the ninth paragraph)

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