Dive Brief:
- The Puerto Rico Electric Power Authority (PREPA) has been given until July 31 to meet its $250 million debt to CitiGroup and its $550 million debt to a Scotiabank-led five bank consortium but restructuring and big losses for the banks look increasingly likely.
- With the PREPA power price already twice the mainland electricity price because of the island’s dependence on imported oil for electricity generation, a rate increase is not practical and efforts to transition to less costly natural gas have been blocked by regulatory complications.
- Moody’s Investors Service recently downgraded PREPA's rating to a lower level of junk bond.
Dive Insight:
PREPA supplies electricity to 3.6 million Puerto Ricans and has used the loans provided by the banks to buy oil for power generation.
Because many of Puerto Rico’s corporations are expected to seek bankruptcy protection under a just-instituted Recovery Act, a PREPA restructuring would likely set precedents as the island territory works through debt problems permeating its entire economy. Like states, Puerto Rico cannot file for Chapter 9 federal bankruptcy protection, making its investors concerned about a default.
Puerto Rico's Recovery Act allows public corporations to restructure debt and renegotiate labor contracts but does not support commonwealth-issued general obligation bonds, which is why Franklin Templeton Investments and Oppenheimer Funds filed a federal lawsuit, arguing that only Congress can create bankruptcy laws.
