March 28, 2015 / 8:31 PM / 5 years ago

Exclusive: Creditors offer Puerto Rico's troubled utility $2 billion financing - sources

NEW YORK (Reuters) - Creditors of Puerto Rico’s debt-laden power authority have offered it $2 billion in new financing, including $1.2 billion to fund a new natural gas operation, in exchange for assurances that it would repay its debt, two people close to the matter told Reuters on Saturday.

While it remains to be seen if the Puerto Rico Electric Power Authority will accept the proposal, such a financing could stave off a messy default that would reverberate around the U.S. municipal bond market, and allow the utility to modernize its business, a key element in fixing Puerto Rico’s ailing economy.

It would also go some way to resolving a major uncertainty for investors at a time when the U.S. commonwealth is seeking to raise around $3 billion to stabilize its finances.

Burdened by $9 billion in debt, PREPA has been in financial restructuring talks for months as the slide in oil prices have emboldened creditors to resist a haircut, or reduction in the amount they are owed.

PREPA’s Ad Hoc group of creditors, which includes OppenheimerFunds, Franklin Templeton, BlueMountain Capital and others, offered the $2 billion financing during negotiations with the utility to extend a forbearance agreement set to lapse on Tuesday, said the two people, who declined to be identified because the discussions were private.

The forbearance agreement - a form of payment relief that stops a creditor from declaring a debtor in default to give it time to repay delinquent sums - was signed last August.

It is unclear how much momentum the new financing proposal has, and its feasibility may yet be challenged.

The first of the two people close to the matter said PREPA is lukewarm to the offer. Puerto Rico has been lobbying the U.S. Congress to allow PREPA and other struggling utilities to file for bankruptcy, which would make it easier to impair creditors.

A third person close to the discussions said the financing proposal is premature because PREPA’s chief restructuring officer, AlixPartners’ Lisa Donahue, has not finished analyzing the power authority’s financial state.

Donahue did not respond to an email from Reuters on Saturday. A PREPA spokesman said the agency would not comment until Monday.

On Thursday, Donahue said PREPA would likely continue to discuss an extension of the forbearance agreement with creditors over the weekend and issue a statement on Monday. Sources close to the discussions on Friday expressed optimism at reaching a deal by Tuesday.

EPA COMPLIANCE

The bondholders’ proposal is designed to bring PREPA into compliance with the U.S. Environmental Protection Agency’s Mercury and Air Toxics Standards (MATS). The plan contemplates charging customers 22 cents per kilowatt hour, a decrease from 2014 rates, according to the two people close to the matter.

Before oil prices dropped in December, many analysts believed PREPA would eventually be converted to a natural gas operation.

The bondholders’ proposal would forgo a full conversion, building one natural gas facility, utilizing some solar energy, and burning blended fuels in Puerto Rico’s northern regions, the first of the two people said.

The creditors retained management consultants PA Consulting and Black & Veatch to help assess PREPA’s needs, and are keen to resolve the issue sooner rather than later, according to the second person.

Puerto Rico’s financing authority, set to run out of cash later this year, is trying to raise $3 billion in new capital, and uncertainty at PREPA risks spooking investors. Bondholders felt that gave them leverage to push for a quick restructuring at PREPA, the second person said.

A market source familiar with Puerto Rico said the bondholder group may receive take back paper - repayment in the form of new discounted debt - and in addition provide financing for capital expenditure.

The source said, however, that such a restructuring did not seem sufficient to solve PREPA’s problems.

Additional reporting by Edward Krudy, Megan Davies and a contributor in San Juan; Editing by Tiffany Wu

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