(Adds analyst comment, background)
SAN JUAN, Puerto Rico Aug 13 Puerto Rico's
electric power authority, PREPA, is likely to get an extension
of vital lines of credit in an agreement that could see lenders
appoint a restructuring expert at the debt-stricken utility, a
financial industry executive familiar with the situation said on
The U.S. commonwealth's restructuring specialists and its
Government Development Bank are in talks with banks to extend
PREPA's loans of $671 million to March 2015, with an option to
shorten the extension to the year end, said the source, who is
in contact with the negotiating parties.
PREPA has until Thursday to secure an extension of the
credit lines, which it uses to buy oil for its generators.
Failure to secure an extension could force it to seek protection
under Puerto Rico's new Recovery Act that allows some public
entities to enter a bankruptcy-like process.
Another option would be a short-term extension similar to a
recent two-week reprieve, said the source, who declined to be
identified because the discussions are confidential. Talks are
continuing and still may fail to produce a deal.
PREPA is on the hook for $146 million from Citigroup Inc
and $525 million from a consortium led by Scotiabank
. Citi and Scotiabank declined comment and PREPA was not
immediately available for comment on the terms of a possible
"The banks will end up folding and extending the lines until
March 2015, with an option to shorten that extension to December
2014," said the source.
The option to shorten a possible extension from March to
December would be triggered by a vote of 25 percent of lenders,
the source said.
Gary Krellenstein, an energy specialist at Oxford Advisors,
said an extension to the credit lines would be a positive
development. "It will allow some of the creditors, the
commonwealth, and PREPA to negotiate further to see if there are
some alternatives available to them," he said.
The banks could also name a chief restructuring officer at
PREPA with responsibility for developing a restructuring plan by
March, the source said. Such a move would suggest PREPA may
eventually restructure over $9 billion in debt as is widely
PREPA gained a two-week extension to the credit lines that
expires on Thursday. Reuters reported at the time that banks
were asking for 9 percent interest over the London Interbank
Offered Rate (LIBOR). Details of the agreement were not
PREPA uses the credit lines to buy oil from its supplier,
Brazil's Petrobras, and the loss of those lines could complicate
operations even if it is able to tap existing funds to pay for
operating expenses in the short term.
Hedge funds, that have been buying up Puerto Rico debt
lately, are offering to provide PREPA with interim financing,
according to two investors currently in Puerto Rico, as well as
longer term financing to help convert their old oil powered
infrastructure to cheaper natural gas.
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 on oil and electricity prices on the island are
double those in the mainland United States.
Oxford Advisors' Krellenstein estimates that PREPA could
save $1 billion on its yearly $2.6 billion oil bill if it
converts to natural gas.
(Reporting by Reuters in San Juan, writing by Edward Krudy and
Megan Davies; Editing by Chizu Nomiyama, Matthew Lewis and Tom