House Bill Proposes Puerto Rico Bankruptcy; S&P Downgrades PREPA Utility

http://blogs.barrons.com/incomeinvesting/2014/07/31/house-bill-proposes-puerto-rico-bankruptcy-sp-downgrades-prepa-utility/

July 31, 2014, 4:58 P.M. ET
House Bill Proposes Puerto Rico Bankruptcy; S&P Downgrades PREPA Utility

By Michael Aneiro

Puerto Rico’s nonvoting congressional delegate today introduced legislation in the U.S. House of Representatives that would allow Puerto Rico’s government-owned corporations to file for Chapter 9 bankruptcy protection, the same type of municipal bankruptcy protection Detroit sought last year. The move comes a month after the commonwealth passed the Puerto Rico Public Corporation Debt Enforcement and Recovery Act, which allows Puerto Rico’s public corporations to restructure their debts.

“I believe that amending the U.S. Bankruptcy Code to extend Chapter 9 to Puerto Rico is the most sensible and logical way to proceed,” wrote Pedro Pierluisi, Puerto Rico’s resident commissioner. “My legislation would simply enable the Puerto Rico government to authorize its government-owned corporations to utilize the tried-and-true Chapter 9 procedure if it becomes necessary, under the expert supervision of an impartial federal bankruptcy judge, based on legal precedent established in Chapter 9 proceedings that have taken place throughout the nation.”

The fallout from the Recovery Act continued today as Standard & Poor’s banished the Puerto Rico Electric Power Authority to the depths of speculative grade, cutting PREPA’s credit rating to triple-C from single B-minus. (S&P also affirmed Puerto Rico’s general obligation bond rating at double-B.) S&P said the deep-junk rating indicates that PREPA’s debt is “vulnerable to nonpayment,” and said any adverse business, financial, or economic conditions could leave PREPA unable to pay its debts.

“We believe that the absence of an overarching solution to liquidity issues and the structural imbalance among its revenues, operating expenses and debt service commitments suggests an increasing likelihood that the authority will not be able to satisfy debt service obligations on time and will avail itself of the [Recovery Act] and restructure all or portions of its debt,” said S&P credit analyst Judith Waite in a statement.

Earlier this month, rival rating agency Moody’s Investors Service similarly cut PREPA’s rating into equally deep-junk territory.

Earlier today, PREPA sent out a statement saying its lenders have extended until Aug. 14 their agreements not to exercise remedies against PREPA as a result of the recent credit downgrades. Under the agreements, PREPA can continue to delay certain payments that were due in July while still making payments due to employees and suppliers. PREPA said it’s “having productive discussions” with its creditors and will continue “to evaluate various strategies” to achieve its financial and operational objectives.

“This latest show of support from our bondholders, bond insurers and lenders  provides us with additional time to evaluate all available options to ensure we are reaching the best possible outcome for our employees, customers, creditors and suppliers,” said PREPA Executive Director Juan F. Alicea Flores in a statement.