Unsuccessful Debt Talks Lead to Litigation for Puerto Rico’s Bankrupt Power Utility

Puerto Rico’s bankrupt power utility and bondholders may face off in court Wednesday in the wake of Hurricane Fiona’s damage after mediation talks over the agency’s $9 billion debt restructuring ended last week without a deal.

US District Court Judge Laura Taylor Swain ordered a hearing for Wednesday on the commonwealth’s push to start litigation after months of court-supervised mediation failed to produce a debt-cutting plan for Puerto Rico’s Electric Power Authority, called Prepa.

The breakdown in the debt talks comes as Puerto Rico slowly restores power after Hurricane Fiona grazed the island Sunday, dumping heavy amounts of rain and causing catastrophic flooding, according to the National Hurricane Center.

Prepa’s restructuring hinges on how it can reduce its obligations sufficiently so that island residents – 44% of whom live in poverty and suffer from chronic blackouts – are able to repay while at the same time compensating creditors, some of whom haven’t been paid in eight years.

“The parties’ respective positions on what is reasonable in the context of Prepa’s rates and needs, and on their legal rights have resulted in a currently unbridgeable gap on the economic terms of a restructuring,” lawyers for the oversight board wrote in their filing late Friday.

Resolving Prepa’s finances and strengthening its power grid are crucial in providing reliable electricity and boosting Puerto Rico’s economy.

Prepa began skipping principal and interest payments in 2017 when its bankruptcy began.

In response to the board’s litigation request, a group of ad hoc bondholders and bond insurers early Monday asked Swain to end Prepa’s bankruptcy or appoint a receiver that would raise electricity rates to cover the utility’s operating and debt costs, according to court documents.

If Swain declines to allow a receiver for Prepa, the bondholders and insurers want the court to impose a Nov. 1 deadline for the board to file a debt restructuring plan, with a confirmation hearing to be held no later than May 1.

“Prepa largely continues to do business as usual – declining to charge its customers an amount sufficient to pay the debt service that it is contractually obligated to pay, not collecting from government entities that are years overdue on their bills, failing to move forward with putting FEMA funds to work, and faltering on improving its historically abysmal operational track record,” lawyers for the creditors wrote in Monday’s filing to the court.

A key disagreement in the negotiations is whether Prepa’s bonds are backed by the utility’s gross revenue or repayment is secured only through a so-called sinking fund held by the bond trustee, according to court documents.

Prepa is the island’s main supplier of electricity and, with about 1.5 million customers, is one of the biggest public power utilities in the US. It’s been negotiating with bondholders and insurance companies since 2014 on how to reduce its obligations.

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