Puerto Rico Electric Power Authority’s creditors are offering to lend the bankrupt utility $1 billion to help it after Hurricane Maria damaged the utility system so severely that the entire island was left without power.
The potential financial lifeline from investors holding $3 billion of the utility’s bonds would only be available if the authority agrees to repay a third of that debt for 85 cents on the dollar, about twice what some securities are currently trading for and in line with an offer that authorities rejected in favor of bankruptcy.
The promise comes as Puerto Rico and U.S. Department of Energy officials are racing to restore electricity while hospitals and nursing homes struggle to find fuel for generators. It may cost billions of dollars to repair Prepa, as the utility’s known, and some parts of the island may be without power for as long as six months, according to Governor Ricardo Rossello.
The money could help Prepa meet local matching requirements to receive Federal Emergency Management Agency funds, according to the bondholder group. FEMA may allocate as much as $9 billion to Prepa, depending on the federal agency’s matching thresholds. Prepa needed $4 billion of repairs to upgrade its system even before Maria struck the island last week.
“Our thoughts are with the people of Puerto Rico and its residents during this difficult time and we hope that this capital commitment will provide bridge financing and matching funds as required by FEMA legislation while supporting the commonwealth’s recovery,” Stephen Spencer, managing director at Houlihan Lokey, which is advising the group of bondholders, said in a statement.
The proposal also involves the bondholders exchanging $1 billion of outstanding bonds for $850 million of new debt through so-called debtor-in-possession financing, which is routinely extended to corporations working under court protection from creditors. Those DIP notes — and also the $1 billion loan to help match FEMA funds — would receive priority over all other Prepa bonds.
“It’s a nice positive step to try to show confidence and a willingness to try to work two things at one time — provide financing and solve some of the issues of the outstanding bonds,” said Daniel Solender, head of municipals at Lord Abbett & Co., which manages $20 billion of state and local securities, including Prepa bonds. Lord Abbett isn’t part of the Prepa bondholder group.
The 85-cent offer is higher than where the bonds are trading now. Debt maturing in 2032 changed hands Tuesday at an average 43.2 cents on the dollar, down from nearly 56 cents at the start of the month, data compiled by Bloomberg show.
The 15-cent haircut is also the same concession that bondholders agreed to in a prior $9 billion Prepa debt restructuring plan. A federal oversight board that manages Puerto Rico’s finances rejected that creditor deal in July, saying it put residents at risk of higher electricity costs. The board then filed for bankruptcy protection for Prepa.
The entire $1.85 billion DIP offer is subject to federal board and Prepa approval. A spokesman for the federal board and a spokeswoman for Puerto Rico’s fiscal agency didn’t have immediate comments. Prepa has been referring queries about its finances to the fiscal agency.