June 5, 2015 / 1:45 PM / 4 years ago

UPDATE 2-Puerto Rico's PREPA reaches extension deal with creditors

(Adds Moody’s details)

June 5 (Reuters) - Puerto Rico’s struggling electric power utility PREPA said on Friday that creditors agreed to extend a key credit agreement until June 18, giving the utility time to work on a turnaround plan.

The agreement, which was due to expire on Thursday, will protect the debt-ridden utility from default while it seeks a fix. The extension confirmed a Reuters report from Thursday.

"We continue to work with creditors towards a consensual resolution," said Lisa Donahue, chief restructuring officer of PREPA. (bit.ly/1KQqL2X)

PREPA, with around $9 billion of debt, faces a $400 million payment on July 1 to bondholders. Credit ratings agency Moody’s expects the utility to default on that payment and in a note on Friday said the agreement did not change its outlook. Challenges will remain if a restructuring agreement is reached, it said.

PREPA’s long-term prospects depend upon converting a largely oil-fired generation fleet to natural gas, lowering operating costs, improving collections and increasing efficiencies, while also keeping electricity rates at the lowest possible levels to help spur economic growth, the agency said.

PREPA’s turnaround plan, aimed at making the utility’s business more sustainable, requires investment of at least $2.3 billion and seeks a restructuring with creditors by June 30.

Creditors have been skeptical about the proposal, with one bondholder representative on Monday calling parts of the plan “unworkable.”

Creditors can have competing interests during a restructuring. Risk-minded hedge funds that buy debt at discounts may cut deals that net them profits. Insurers that guarantee the debt can be more motivated to enforce contractual terms.

The PREPA talks are seen as a critical forerunner of whether the U.S. territory can overcome political and other challenges in fixing broken public entities. With Puerto Rico itself facing a June 30 deadline to approve a new budget and under pressure to raise capital, time is running short as it seeks to persuade investors that it can right the ship.

Moody’s current rating on Puerto Rico, Caa2, incorporates a high probability of default. The rating for PREPA, Caa3, also factors in the view that recovery for bondholders will likely range between 65 and 80 percent. (Reporting by Narottam Medhora in Bengaluru and Jessica DiNapoli in New York; Editing by Maju Samuel, Megan Davies and Alan Crosby)

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