Dive Brief:

• The Puerto Rico Electric Power Authority (PREPA), the U.S. territory’s public utility and only electricity provider, is continuing to provide power and negotiate with bondholders despite reaching a deadline on Jan. 22 that caused a debt deal reached last month to be terminated, Bloomberg reports.
• The bondholders agreed to extend the restructuring support agreement (RSA) on the utility's $9 billion debt until Feb. 12 to allow Puerto Rico’s legislators time to pass the PREPA Revitalization Act, which will give the RSA legal legitimacy.
• Without the RSA, PREPA must pay more than $1.1 billion to an Ad Hoc Group of bondholders, including traditional municipal bond investors, hedge funds, and fuel line lenders and Puerto Rico’s Government Development Bank (GDB) by July 1.

Dive Insight:

Puerto Rico, like its utility, is deep in debt, with more than $70 billion in liabilities to bondholders. 

The island's financial woes began in the 1990s, worsened with the loss of vital tax credits in 2006, and became insurmountable after the 2008 recession. The Obama administration is pushing Congress to alter the Bankruptcy Amendments of 1983-84 to allow restructuring under federal Chapter 9 rules, currently prohibited for states and territories like Puerto Rico. And the U.S. Supreme Court will hear a case this spring that may bypass the need for Congressional action by legalizing bankruptcy.

If either happens, it could allow the territory or utility to reduce their obligations substantially, but PREPA — quickly running out of cash — isn't holding out for either of the solutions. Just before the new year, the utility finalized the RSA with a group of bondholders, but it expired Jan. 22 when lawmakers failed to pass the revitalization act, which would codify conditions of the agreement into law.  

If finalized by lawmakers, the RSA deal is expected to reduce the utility's obligations by $600 million and postpone another $700 million of its debt for five years. It also includes new standards for operations, a proposed new rate structure, and an investment plan. 

The revitalization act was introduced in the Puerto Rico legislature last November, but work on it was delayed when events in Washington, D.C. made Chapter 9 bankruptcy a real possibility. Congress is not expected to take any action beyond hearings until March, and a Supreme Court ruling won't likely be released until June.

That's problematic for PREPA, which is low on cash to finance power delivery. In what could be a sign of progress, Bloomberg reports that the utility struck an agreement with the banks that finance its fuel purchases to continue supplying power while negotiations continue. The banks agreed to keep their negotiations out of court until Feb. 12.

“We are grateful to our fuel lenders for their support as we continue our efforts to transform PREPA,” Lisa Donahue, the utility's chief restructuring officer, said in a statement Sunday. “We are having ongoing discussions with the ad hoc group and other stakeholders.”