(Adds comments from bond insurers)
July 1 (Reuters) - Puerto Rico’s power authority, PREPA, avoided default on Wednesday by making a $415 million bond payment partly financed by insurers that backed the bonds, but creditors cautioned they would take legal action if restructuring negotiations with the utility over its $9 billion debt deteriorate.
The restructuring talks are seen as a gauge of whether the U.S. commonwealth can fix other broken public entities as it tries to climb out of a $73 billion debt hole. Puerto Rico’s governor, Alejandro Garcia Padilla, said on Monday he wanted to restructure debt and postpone bond payments to solve the island’s fiscal crisis.
PREPA faces resistance from creditors reluctant to take reduced payouts. A restructuring agreement must be reached by Sept. 1, according to a statement by the bondholders.
“While we believe there is the opportunity to reach an agreement by September 1st, it is essential that both sides be willing to compromise, treat each other fairly and negotiate in good faith,” said Stephen Spencer from Houlihan Lokey, a financial adviser to PREPA’s bondholder group.
Spencer said the agreement “may be discontinued and appropriate legal action taken” if negotiations deteriorate or there is “a broader decision made by Puerto Rico as a whole to treat bondholders unnecessarily unfairly during this process.”
PREPA said it was funding the $415 million payment with about $153 million of cash out of its general fund and the remainder from its debt service reserve accounts.
As part of the deal, bond insurers will buy $128 million of interest bearing bonds from PREPA, proceeds of which will replenish a portion of PREPA’s operating funds used to make the principal and interest payment, one of the insurers, Assured Guaranty said in a statement.
Assured Guaranty Chief Executive Dominic Frederico said in a statement that regardless of future developments, “debt service payments to holders of Assured Guaranty-insured PREPA bonds remain protected by our guaranty.”
National Public Finance Guarantee Corporation, a subsidiary of MBIA Inc, said it looked forward to “continuing what has been an active and constructive dialogue on how to best position PREPA.”
Creditors also agreed to extend a creditor forbearance agreement, which protects PREPA from litigation until Sept. 15, from June 30.
Parties to the creditor agreement, known as a forbearance agreement, include bank lenders and an ad hoc bondholder group made up of hedge funds and institutional investors, such as OppenheimerFunds and Franklin Advisers, according to the original forbearance agreement.
Reporting by Megan Davies in New York; Editing by Jeffrey Benkoe and Tom Brown