Dive Brief:
- Puerto Rico Electric Power Authority (PREPA) is causing investors to worry it may default on bond payments expected to be made this week to creditors after the island's legislature and governor passed a debt restructuring plan to help the utility and other public corporations avoid bankruptcy.
- PREPA needs the OK from 75% of its creditors to allow the debt restructuring process to begin. The utility has $8.6 billion in debt, only 30% of which is covered by bond insurance.
- Investor funds Oppenheimer Rochester Funds and Franklin Funds have filed lawsuits against Puerto Rico over its debt restructuring bill. The funds have $907.2 million and $821.4 million of PREPA debt, respectively.
Dive Insight:
It will be a hard task for PREPA to get 75% of creditors to agree to debt restructuring, said Matt Fabian of market research firm Municipal Market Advisors. The utility may offer 10 cents or less per dollar owed, and that might not be good enough to satisfy creditors.
PREPA already has been downgraded to "junk" status by ratings agencies Standard & Poor and Moody's. Uninsured PREPA bonds maturing in 2040 were trading at a record-low 44.5 cents, down from more than 50 cents in the last week of June.
The utility has been hit with high power prices for years and recently had to delve into what little capital it had in order to buy fuel for electric power generation. PREPA's electricity prices sit at $0.24/kWh, far above the U.S. average $0.12/kWh. This is mainly down to the PREPA's reliance on imported oil as its main fuel source. The island's legislators are currently investigating the utility's rates and the company has been asked to bring down fuel costs.
