UPDATE 1-Puerto Rico's power authority bonds jump after creditor agreement

Fri Aug 15, 2014 12:16pm EDT

(Adds analyst quote, updates market activity)

NEW YORK Aug 15 (Reuters) - Bonds of Puerto Rico's PREPA power authority hit their highest price in nearly two months on Friday, a day after the troubled utility reached a deal with creditors to extend credit lines and develop a plan to restructure its business.

Although PREPA is still losing money and is struggling with more than $9 billion of debt, Thursday's agreement ensures the utility cash until next March to make oil purchases. PREPA also agreed to make its $209 million coupon payment to bondholders in January, avoiding the prospect of an imminent default.

"Part of me says this is kicking the can down the road. Why would the bid improve except that they're going to receive another coupon payment?" said Robert Amodeo, a fund manager at Western Asset. Amodeo does not hold PREPA bonds but does own Puerto Rico general obligation and tax revenue bonds.

PREPA bonds due in 2035 with a 5.25 percent coupon traded up 6 cents at an average price of 53 cents on the dollar and yield of 11.063 percent. The bonds traded at their highest level since June 18.

The bonds have rallied from an average low of 34.500 cents hit on July 7, about a week after Puerto Rico passed the Recovery Act, which allows some public corporations to restructure their debt. Still, the bonds remain at heavily discounted levels, indicating the market expects a writedown at some point.

The core of PREPA's problems is that it uses high-cost oil to generate electricity. PREPA spends almost two-thirds of its operating budget, or $2.6 billion, on oil. Electricity prices on the island are double those in the mainland United States.

"This is a positive step but at the same time I don't think this changes the underlying problem, which is the utility runs at a loss and has to buy oil to produce energy at a loss. That has to change," said Amodeo.

(Reporting by Edward Krudy; Editing by Dan Grebler)