Puerto Rico electricity bonds get a charge from reforms

Wed May 28, 2014 2:22pm EDT

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May 28 (Reuters) - Debt issued by Puerto Rico's power provider got a boost on Wednesday after Governor Alejandro GarcĂ­a Padilla signed into law measures aimed at stabilizing rates, diversifying energy sources and improving service.

Several large blocks of Puerto Rico Electric Power Authority (PREPA) bonds changed hands at higher prices in early trading in the secondary U.S. municipal bond market.

The new law requires PREPA, a junk-rated municipal debt issuer with about $8.8 billion of revenue bonds in the market, to supply electricity at rates that are "accessible, just and reasonable," according to a statement from Padilla's office.

PREPA now has 180 days to begin reviewing its rates and must, beginning on July 1 for three years, make 60 percent of its fossil fuel energy generation "highly efficient."

The law also establishes a new regulatory body, which will have investigative powers, for the electricity industry, according to the statement.

Padilla said the law marks PREPA's biggest transformation since it was created 73 years ago.

On Wednesday, a $630,000 block of power revenue refunding bonds maturing in 2016 with a 5.375 percent coupon was purchased for 97.75 cents on the dollar at a yield of 6.546 percent. The last time those bonds traded was on May 7, when they were priced at 96.337 cents on the dollar with a yield of 7.252 percent.

Another revenue refunding bond, maturing in 2034 with a 5.25 percent coupon, traded five times, including two inter-dealer trades of more than $1 million at about 98 cents on the dollar, up about a cent from a similar trade the day before.

The market may have responded positively because "the status quo is unacceptable," said Robert Donahue, a managing director at Municipal Market Advisors.

"PREPA is at the end of the runway with the current operating structure, and what the governor signed yesterday was the result of a very arduous process," Donahue said.

Private companies are developing their own energy because of frustrations with PREPA, and utility bills for many families have become their biggest housing cost.

Investors may also like the law because it's less radical and more incremental than a wholesale PREPA restructuring, Donahue said.

PREPA, which is low on cash, is also in the midst of renegotiating much-needed lines of credit that are set to expire soon, Donahue said. (Reporting by Hilary Russ; Editing by Leslie Adler)

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