(Recasts with detail on bondholder demands)
By Nick Brown and Megan Davies
SAN JUAN/NEW YORK, Aug 24 (Reuters) - Potential buyers of bonds being sold by Puerto Rico’s water authority, PRASA, want stronger protections in the event the agency becomes insolvent, people close to the matter said, as the island’s government tries to assure investors it does not need restructuring.
PRASA’s $750 million bond sale, initially slated to price last week, has been delayed to give would-be buyers more time to analyze materials. According to three people familiar with the matter, the delay is due in part to concerns by bondholders over their rights in an insolvency.
Specifically, they want the right to appoint a receiver to control PRASA’s finances in the event it goes bust, two of the people said. Some are also angling for so-called make-whole language that would accelerate the bonds in the event of default, one of the people said.
Puerto Rico’s government on Monday sought to reassure investors about PRASA in light of the island’s recent petition asking the U.S. Supreme Court to overturn a ruling barring Puerto Rico from putting utilities into bankruptcy.
The timing of the appeal, coinciding with PRASA’s bond issue, should not be read as a sign that the government intends to restructure PRASA’s debt, Victor Suarez Melendez, the top aide to Gov. Alejandro Garcia Padilla, said in a statement.
“Assuming PRASA’s financial projections are met and the utility is able to access the market on reasonable terms and for sufficient amounts to cover its capital needs, we currently do not contemplate PRASA necessitating a restructuring of its debt,” Suarez said.
The statement did not mention explicit concerns raised by investors, and a spokeswoman for Suarez declined to comment on whether investors were seeking stronger protections.
In the Supreme Court petition, filed on Friday, Puerto Rico asked the justices to hear an appeal of a lower-court ruling striking down a law that would have allowed the island to put insolvent utilities into legal restructuring proceedings.
Unlike U.S. states, Puerto Rico does not have access to U.S. bankruptcy laws, which the island called a legal “no man’s land,” leaving it without access to either federal bankruptcy laws or a restructuring statute of its own.
The Supreme Court is not obligated to hear the appeal, and even if it does, experts are skeptical of its success.
“Even a Supreme Court reversal cannot immediately start to address Puerto Rico’s financial crisis because the best-case scenario is to start another round of fights,” namely whether the island is constitutionally blocked from impairing debt, said Melissa Jacoby, a bankruptcy professor at the University of North Carolina School of Law.
PRASA’s debt deal is the first being attempted by any Puerto Rican entity since the territory failed on Aug. 1 to make full payment on bonds sold by its Public Finance Corp. Puerto Rico has said the partial payment does not constitute a default, but it was considered one by creditors and ratings agencies, the first by the U.S. territory.
Three leading credit agencies have rated PRASA, which has around $3.7 billion in outstanding debt, as junk. Fitch rated the issue “CC,” Moody’s rated PRASA’s bonds “Caa3” and Standard & Poor’s rated them “CCC-.”
Daniel Hanson, an analyst at Height LLC, said in a note on Monday that “the headline risk in Puerto Rico broadly should incentivize investors to buy PRASA bonds in the secondary markets instead of a primary offering.” (Reporting by Nick Brown in San Juan and Megan Davies in New York; Editing by W Simon and Dan Grebler)