(Adds analyst quote, reaction from governor to NY Fed report)
By Edward Krudy
NEW YORK, July 31 Banks gave Puerto Rico's
electric power authority a two-week extension on $671 million in
revolving loan facilities on Thursday as the troubled authority
negotiates with creditors over its vital near-term cash needs.
The reprieve was not enough to stop another downgrade from
ratings agency Standard & Poor's, which cut its view on the
authority, known as PREPA, two notches deeper into junk. S&P
said whether PREPA met its obligations was dependent on factors
ultimately beyond its control.
Under the new deal with creditors, PREPA received an
extension until Aug. 14 on credit lines it uses to pay for
operating expenses. Of that, $146 million was due to Citigroup
Inc on Thursday. Scotiabank is owed about $525
PREPA said creditors had agreed not "to exercise remedies"
as a result of credit downgrades.
"This latest show of support from our bondholders, bond
insurers and lenders provides us with additional time to
evaluate all available options to ensure we are reaching the
best possible outcome," Juan Alicea Flores, executive director
for PREPA, said in a statement.
The authority did not disclose terms of the extension.
Reuters reported on Wednesday that lenders were seeking 9
percent over the London Interbank Offered Rate (LIBOR) to extend
credit lines to PREPA. Last year PREPA paid LIBOR plus 2.25
percent to 2.80 percent.
PREPA is widely expected to restructure its outstanding debt
of over $9 billion. The Commonwealth passed a new law, known as
the Recovery Act, in June. It provides public corporations with
a framework to restructure their debt. The law affects $20
billion of debt with Puerto Rico's corporations.
The act is currently facing a legal challenge from some
bondholders who argue that it is unconstitutional.
Also on Thursday, Puerto Rico's representative in Congress,
Pedro Pierluisi, said he had introduced a bill to include Puerto
Rico in Chapter 9 of the U.S. Bankruptcy Code. Allowing the
Commonwealth's entities to file for Chapter 9 would be a
failsafe if the Recovery Act is struck down.
PREPA also said it is in talks with creditors and insurers
of more than 60 percent of its debt regarding obtaining
near-term liquidity. PREPA uses the credit lines to fund
operations such as oil purchases for its generators.
Despite the extension, the near-term roadmap for PREPA
remained unclear as Thursday's agreement did little but extend
the uncertainty for another two weeks, investors said.
"My guess is that the lenders want to give them some
breathing room but at the same time keep them on a short leash
and keep them working hard," said David Tawil, president of
Maglan Capital, a hedge fund that specializes in distressed
investments. Maglan holds Puerto Rico's general obligation debt
but does not own PREPA debt, Tawil said.
Robert Donahue, an analyst at Municipal Market Advisors,
said the banks are facing a choice between giving Puerto Rico
more time and having the commonwealth default and then hashing
it out in court. "They're between a rock and a hard place," he
said. "Puerto Rico has the upper hand in these negotiations."
Prices of PREPA's bonds rose on Thursday, continuing a
recent rise after falling heavily after passage of the Recovery
Act. PREPA series 2012A revenue bonds with a 5
percent coupon and a 2024 maturity date traded with an average
price of 48.658 cents on the dollar, compared with 47.837 cents
The New York Federal Reserve issued a report on Thursday
urging the commonwealth to reform its public corporations. The
New York Fed said the corporations had been responsible for much
of the island's growth in indebtedness over the last 12
In response to the report Puerto Rico's governor, Alejandro
Garcia Padilla, said his administration continued to "execute on
a comprehensive plan to drive economic growth and fiscal
Standard & Poor's said PREPA is likely to default on its
credit lines and file for protection under the new restructuring
law. The ratings agency cut Puerto Rico's debt to CCC from BB
minus and warned of further downgrades ahead.
(Reporting by Edward Krudy; Additional reporting by Hilary
Russ; Editing by Lisa Shumaker and Dan Grebler)