(Adds analyst quote, reaction from governor to NY Fed report)
By Edward Krudy
NEW YORK, July 31 (Reuters) - 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 million.
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 on Wednesday.
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 years.
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 stability."
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)