Puerto Rico Utility Bondholders Split on Way to Bankruptcy Exit

A group of bond investors is expected to back a new restructuring plan for Puerto Rico’s power utility but would have to contend with other creditors that want to keep fighting for a better deal.

BlackRock, Nuveen and Franklin Advisers are nearing a restructuring deal to write down $8.3 billion in debt owed by the bankrupt electric monopoly to a fraction of that amount, people familiar with the discussions said.

The new deal would open a path to ending the Puerto Rico Electric Power Authority’s six-year bankruptcy case and has divided bondholders that until recently were united in negotiations. Bondholders including GoldenTree Asset Management are preparing to battle in court to try to sink the debt plan, due to be filed in court on Friday, according to people familiar with the matter.

BlackRock and others owed nearly $2.4 billion recently broke with a longstanding Prepa bondholder committee advised by law firm Kramer Levin Naftalis & Frankel and formed their own splinter group with lawyers from Paul Weiss Rifkind Wharton & Garrison, court records show. GoldenTree also has hired its own lawyers from White & Case.

A spokesman for Puerto Rico’s financial oversight board, which is steering the talks, said it is finalizing a settlement with significant bondholders that would provide a viable path to ending Prepa’s bankruptcy.

Investing in Prepa hasn’t gone well for BlackRock and Nuveen, which bought in after the oversight board reached an agreement with bondholders in 2019 to raise electricity rates enough to repay them 67.5 cents on the dollar. The Covid-19 pandemic put that proposal on pause until it was nixed by Puerto Rico’s governor in 2021, leading to another round of negotiations.

A Prepa bond maturing in 2040 changed hands at 37 cents on the dollar earlier this month, down from nearly 80 cents after the 2019 deal was announced.

The market value of Prepa’s bonds exceeds the $2.5 billion the oversight board has said it can afford to pay creditors. Unless more resources are made available to bondholders, prices could fall further.

Justin Peterson, a Trump appointee to the oversight board, said he resigned his position last week in anticipation of the new plan because he disagreed with the “unfair and coercive” terms likely to be offered to Prepa’s bondholders. His term was set to expire in October.

The oversight board spokesman said the plan being worked on is fair to creditors and sustainable for Prepa and Puerto Rico.

The utility has turned over the management of its energy grid and generation fleet to private operators but still has liability for the bond and pension debts that drove it to bankruptcy along with the rest of the island government. Puerto Rico has restructured nearly all of its public debt apart from Prepa, which needs to collect more revenue from its customers to repay its debts.

The oversight board and bondholders have disagreed on how much of a rate increase customers can afford, especially those with lower incomes. A hike in electricity rates would be politically unpopular in Puerto Rico, where roughly 40% live in poverty, according to U.S. Census Bureau data.

The judge overseeing Prepa’s bankruptcy pushed bondholders toward a settlement in March by ruling to limit their collateral rights over the utility’s current and future revenue other than minimal funds in reserve accounts. The oversight board then slashed its revenue projections for Prepa, saying it could support only $2.5 billion of debt after bankruptcy compared with the $9 billion it currently owes to banks and bondholders.

Write to Andrew Scurria at [email protected]