One set of Puerto Rico bondholders reaches deal

One group of bondholders in Puerto Rico has reached a settlement with the commonwealth over a payment that was due today, averting a default amid a broader debt crisis that has drawn the gaze of the municipal bond world.

The bondholders holding debt connected to the island's electric utility, the Puerto Rico Electric Power Authority, have reached an agreement with the commonwealth to effectively refinance a $416 million payment that was due today.

The deal reflects a positive step in Puerto Rico's bid to avoid total insolvency as officials grapple with some $72 billion in bond debt and more than $50 billion in retiree obligations.

"Today's actions show the forward momentum of the negotiations and the willingness of all parties to work together to provide the time necessary to continue discussions and come to a consensual agreement," said Lisa Donahue, chief restructuring officer of Prepa, in a statement.

But the utility, commonly called Prepa, is only one of three public corporations saddled with a crushing debt load in Puerto Rico, which also owes general obligation bond debt.

The island's governor, Alejandro, Garcia Padilla, is pushing Congress to allow the commonwealth's public entities to file for Chapter 9 bankruptcy to escape a significant portion of their liabilities. He called the debts "unpayable" earlier this week.

But, like states, the commonwealth cannot legally file for municipal bankruptcy.

A more likely path for Puerto Rico is a tough bargaining process that could yet result in the commonwealth defaulting on some debt, which would send ripples through the municipal bond community that has long flocked to Puerto Rico debt because it's exempt from federal, state and local income taxes.

Prepa agreed to pay $415 million to bondholders by tapping its general fund for $153 million and paying the rest out of its debt service reserve accounts. Bond insurers also agreed to buy $128 million in new short-term bridge bonds that must be paid by Dec. 15.

If they haven't agreed to a wholesale restructuring of Prepa's debts by Sept. 1, the talks between the utility and bondholders could devolve into a legal battle following the expiration of a forbearance agreement on Sept. 15.

Bondholders warned Puerto Rico against taking aggressive actions against investors during negotiations. They have been angered by the governor's push for bankruptcy.

"While we believe there is the opportunity to reach an agreement by Sept. 1, it is essential that both sides be willing to compromise, treat each other fairly and negotiate in good faith," said Stephen Spencer, a Houlihan Lokey investment banker serving as adviser to the bondholders. "As a result, the agreement may be discontinued and appropriate legal action taken if there are unforeseen deteriorations in either the negotiations with Prepa or a broader decision made by Puerto Rico as a whole to treat bondholders unnecessarily unfairly during this process."

Follow Paste BN reporter Nathan Bomey on Twitter @NathanBomey.