SAN JUAN, Puerto Rico, July 30 Puerto Rico's
troubled electric power authority may dip into a construction
fund to pay for vital oil shipments if talks with banks to
extend $671 million in loans are unsuccessful, according to
people familiar with the situation.
The banks are asking for a much higher interest rate to
extend the loans than the authority, known as PREPA, has been
paying so far, said one lobbyist, who has been discussing the
matter with both government officials and investors in Puerto
Rico bonds. The lobbyist could not be identified because of
client confidentiality concerns.
In one potential deal, banks would extend loans until the
end of the year at an interest rate equal to the London
Interbank Offered Rate, or LIBOR, plus 9 percentage points, the
lobbyist said. That would equate to about 9.24 percent based on
the current level of LIBOR's benchmark three-month rate.
The status of the talks was unclear late Wednesday, but some
analysts and Puerto Rico investors said they expect the credit
lines to be extended in some form.
"I don't think those lenders are going to want to be the
ones that force an insolvency filing under an untested new law
whose constitutionality is being questioned," said David Tawil,
president of Maglan Capital, a hedge fund that owns Puerto
Rico's general obligation debt.
Still, PREPA is widely expected to restructure more than $9
billion in debt after the U.S. Commonwealth passed a law in June
that gave the island's public authorities a legal framework to
enter a process similar to a U.S. bankruptcy.
PREPA has a $250 million credit line with Citigroup and a
$550 million line with a syndicate led by Scotiabank. About $671
of that is currently outstanding. Of that, $146 million is due
to Citigroup on Thursday. The loan from the Scotiabank syndicate
expired through the end of August.
PREPA did not release the terms of the forbearance agreement
it reached with lenders on July 7, and it is unclear if banks
could foreclose on the entire amount due.
Both Citigroup and Scotiabank declined to comment on the
loans, citing client confidentiality. PREPA initially agreed to
pay LIBOR plus 2.25 percent to 2.80 percent for its credit
lines, according to a 2013 annual report. The loan facility with
Citigroup has been extended since then but PREPA has not
disclosed any new terms.
"At this point I think we are all operating in a little bit
of a vacuum of information," said Dennis Pidherny, a PREPA
analyst at Fitch Ratings. "It is really entirely up to the banks
and it's hard to predict."
PREPA uses the credit lines to buy oil from its supplier
Brazil's Petrobras and their loss could complicate its
operations even if it is able to tap existing funds to pay for
operating expenses in the short term.
Officials at the authority have also talked to bondholders
about using its construction fund to pay for operations and oil
purchases until the year's end. That would give PREPA more time
to negotiate with banks, according to a finance industry
executive who formerly worked in the Puerto Rico government.
The authority held a board meeting on Tuesday but has so far
declined to disclose details of the negotiations.
"We are in discussions with our creditors and providers in
light of our current financial situation", PREPA Executive
Director Juan Alicea Flores said Wednesday in a prepared
statement. "We will be sharing updates to our action plan and
the steps we will take as new information rises."
PREPA uses expensive oil generators to produce electricity
and is reliant on oil shipments. It needs to come up with an
arrangement that would push back its need to file for protection
under a new Puerto Rico law until the end of the year.
Using the construction fund to pay for operations would not
be unprecedented. PREPA borrowed $100 million from the fund in
late May to make a $60 million oil purchase. The board approved
the loan on the condition that it be paid back in 30 days.
Some PREPA bonds have recovered after trading as low as 35
cents on the dollar. Still the slide in the Commonwealth's bonds
has weighed on some mutual funds. Franklin Resources Inc
said on Wednesday investors withdrew $400 million from its
municipal bond funds in the latest quarter, a trend that may
continue in the short term on worries over Puerto Rico. The
company's stock slid 1.8 percent on the day.
(Writing by Edward Krudy Reporting by Reuters in San Juan;
editing by Andrew Hay)