SAN JUAN, Puerto Rico - The troubled state-owned Puerto Rico power company announced a restructuring plan Wednesday with some of its creditors that would provide breathing room for an island staggering under the weight of its public debt.
A group of bondholders holding about a third of the power company's $9 billion debt, agreed to reduce the principal owed by the Puerto Rico Electric Power Authority in exchange for new securities worth 85 percent of their existing bonds, the utility said in a statement.
The deal, if approved by bondholders outside the group, would reduce the principal by $670 million and would save $700 million in interest payments and principal over the next five years. It is part of a broader plan to restructure debt and overhaul operations at the utility known as PREPA.
"We will continue to work with the other creditor groups toward a comprehensive agreement that will benefit the people and businesses of Puerto Rico, and provide a clear path to implement PREPA's transformation," Harry Rodriguez, the chairman of the board of directors, said in a statement.
Puerto Rico economist Gustavo Velez said the agreement brings some relief to the power company, but he noted that it is only a partial financial restructuring and does not address more fundamental problems.
"It doesn't address the company's business model or how it will produce more energy," he said, calling the current model an obsolete public monopoly. "Until that is addressed, it will not solve the issue with creditors or the economic problems."
PREPA's debt, as well as its oil-dependent and troubled-plagued power grid, has been a significant contributing factor in the bleak economic outlook for Puerto Rico. The cost of electricity on the island is two times to three times the average on the U.S. mainland, a major complaint for both businesses and consumers.
Manufacturing, the backbone of the Puerto Rican economy, has been in decline for a decade, plunging the island into recession and driving up unemployment, now at 12 percent, and prompting the largest exodus to the mainland in decades. Overall public debt, much of it incurred to paper over budget deficits in recent years, has reached $72 billion, which Gov. Alejandro Garcia Padilla has said is unpayable and must be restructured.
The governor said that the agreement reached by PREPA with its creditors would provide the utility with badly needed liquidity to invest in its infrastructure, which would spur economic growth and create jobs. "These are all critical aspects of the Island's economic recovery plan," Garcia said.
Puerto Rican officials have been lobbying Congress to change U.S. law to allow the public debt of its municipalities and public utilities to be restructured through bankruptcy, which is prohibited because the island is a territory not a state. In the meantime, PREPA and other Puerto Rican entities have been trying to work out agreements like the one announced Wednesday.
The deal was reached after roughly a year of negotiations with the group, which holds about 35 percent of the power company's bonds and represents hedge funds and municipal bond investors.
"Today's announcement represents a significant positive step for all stakeholders involved," said Stephen Spencer with the Los Angeles-based investment bank Houlihan Lokey, an adviser to bondholders. "We believe it provides PREPA with a fresh start and financial flexibility, with bondholders providing meaningful sacrifices to make that happen."
PREPA said it is still in talks with other creditors, including bond insurers and revolving fuel line lenders.
The company also announced it had obtained an extension on its debt payment until Sept. 18, with all creditors in agreement except the National Public Finance Guarantee Corp.
Moody's said in a statement Wednesday that it expects the power company to default in the form of a distressed exchange transaction later this year given the terms of the new agreement.
"While the announcement of the deal...is a positive step towards reaching a restructuring, significant uncertainties remain," the credit rating agency said.