Puerto Rico: Thursday Is “D-Day” for PREPA

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This is a key week in the drama surrounding when and how the Puerto Rico Electric Power Authority (PREPA) will restructure its over $9bn in debt. Thursday of this week (8/14) is “D-Day” for PREPA, as that is when $671mm in lines of credit used to purchase oil to fuel the authority’s power plants are set to expire.

Research firm BTIG posted a blog focusing on the Puerto Rico debt situation on Monday, August 11th. In the post, BTIG analyst Mark Palmer highlights upcoming events for PREPA and possible timelines for the announcement of restructuring.

Earlier extension for Puerto Rico

PREPA announced an extension of its forbearance agreement on a $146 million payment to Citigroup Inc (NYSE:C) on July 31st; however, both that payment and $525 million of a $550 million line of credit from The Bank of Nova Scotia (NYSE:BNS) (TSE:BNS) are due on Thursday, August 14th.

Possible additional extension

Palmer points out that a recent Reuters report claims the banks are likely to make a deal to extend PREPA’s credit lines until the end of the year if PREPA agrees to an increase in the interest rate to LIBOR plus 900bps. The Reuters article also noted that PREPA has discussed with bondholders the possibility of using funds earmarked for the conversion of its power plants to natural gas from oil for purchases of fuel oil and other operating expenses until year end. PREPA borrowed $100 million from the fund in May to fund the purchase of $60mm in oil.

If Citigroup Inc (NYSE:C) and The Bank of Nova Scotia (NYSE:BNS) (TSE:BNS) were to agree to an extension, that would move the likely date of a restructuring announcement to around January 1, when PREPA’s next bond payments are due.

Questions facing PREPA

Palmer analyzes the ongoing restructuring saga by breaking down PREPA’s options. “We believe PREPA faces two different questions. The first is how the authority will address its near-term liquidity needs. The second, the one on which PREPA’s negotiations with its creditors are likely to be focused, is how the authority will be able to fund the conversion of its generating facilities to natural gas from oil.”

The fact that oil is PREPA’s primary fuel source is the main reason that power prices in Puerto Rico are close to 26 cents per kilowatt hour (kWh) versus the average price of approximately 11 cents per kWh across the U.S. (where barely 1% of electricity is generated from oil). These numbers make it obvious that any restructuring deal must include funds for conversion of facilities, which is likely to require more significant concessions from bondholders.

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