The municipal debt drama in Puerto Rico continues.

The Puerto Rico Electric Power Authority (PREPA) is seeking to restructure roughly $9 billion in debt, according to Reuters, and is asking the U.S. courts for help.

PREPA last week asked the U.S. Court of Appeals for the First Circuit (which covers Puerto Rico) to reverse a federal judge’s February decision to reject the utility company’s proposal to restructure its debt under court supervision, similar to what is typically done in bankruptcy cases.

PREPA is arguing that the recently enacted Puerto Rico Public Corporation Debt Enforcement and Recovery Act gives the utility company authority to restructure, considering that it can’t charge its dwindling population even higher rates than it already does to help repay its debt. Reuters said PREPA’s rates are about two times higher than what mainland U.S. utilities charge.

“There’s just not a pot of money there to raise rates,” PREPA attorney Lewis Liman reportedly told the appeals court. The absence of restructuring alternatives is “a euphemism for a stick up, a euphemism for pay me or else,” according to Reuters.

However, attorneys representing the interests of the U.S. funds that hold the debt and the insurance companies that guarantee PREPA’s debt argued that Puerto Rico’s recovery act would undercut the rights of bondholders.

“Congress’ intention was not to give them carte blanche,” Matthew McGill, an attorney for BlueMountain Capital Management, reportedly told the court, adding that a section of the U.S. bankruptcy code prevents states and territories such as Puerto Rico from passing their own bankruptcy laws.

“Uniformity, lawyers for investors argue, is essential for the smooth operation of the $3.7 trillion municipal bond market,” attorneys representing the bond funds reportedly told the court.

The appeals court did not make a ruling in the case, giving no indication of when a decision might be made, Reuters said.

Puerto Rico warned of a possible national cash crunch this year. In a securities filing last week, it said it could not meet all of its debt repayment obligations in 2015.

Bond insurers back an estimated $14 billion out of the $72 billion in debt outstanding by the commonwealth’s government, utilities, and other agencies, according to The Wall Street Journal.

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One response to “Puerto Rico Utility Battles to Restructure Debt”

  1. A few things to note:
    1) Raising rates to service PREPA’s debt is not only “an option”, it is in fact contractually required by the indentures of these notes that are explicitly secured by PREPA’s revenues.
    2) As many articles on the subject have pointed out (including one today published on seekingalpha.com), PREPA has long been used as a tool by Puerto Rico’s politicians to subsidize favored constituencies.
    3) Electricity rates in Puerto Rico are, in fact, not high compared to other island economies, such as Hawaii. It is not fair or reasonable to compare them to mainland US rates.
    4) Puerto Rico’s politicians have undermined its ability to manage the outstanding obligations by attempting to rewrite the rules of the game through the Debt Enforcement and Recovery Act (which, as the article points out, has already been determined by the Courts to be illegal) and attempting to circumvent the constitutional bankruptcy prohibition. Lenders not only need to consider the credit fundamentals when considering future Puerto Rico debt offerings – they also now need to factor in the politicians willingness (in fact desire) to circumvent existing laws and commitments to cheat bondholders in their quest for political gain. This obviously will make it more difficult and expensive for Puerto Rico to access capital markets going forward.

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