(Adds details about conditions to deal)
By Megan Davies
NEW YORK, Dec 23 (Reuters) - Puerto Rico's struggling electric power utility PREPA said on Wednesday it has agreed a deal with creditors - including holdout bond insurers - on a restructuring of its debt, a move seen as key to fixing the island's faltering economy.
Puerto Rico has some $70 billion in debt, a poverty rate of 45 percent, and has been in recession for nearly a decade. On Jan. 1 it faces an about $1 billion debt payment and officials have warned of a default on some of that paper.
With debt of more than $8 billion and inefficient operations, PREPA had been one of the crucial public agencies to restructure, and remained separate to a wider restructuring of the island's debt which officials have been attempting.
PREPA said it reached a deal with creditors holding 70 percent of its debt, which comes after months of negotiations and over a year of extensions to a creditor agreement.
"It's a good feeling that we have been able to get disparate creditors together to agree to a path forward," said PREPA's Chief Restructuring Officer Lisa Donahue. "The one thing that made it doable is that everyone recognised there was a problem and that we needed to solve it together."
PREPA, which provides electricity to Puerto Rico's roughly 3.5 million residents, charges consumers far more than the average customers pay in the U.S. mainland and has been under pressure to convert to generally cheaper and cleaner natural gas. Donahue said the utility had been working to improve customer service and that the restructuring plan calls for investment in gas.
A September deal with a group representing about 35 percent of its bondholders saw those creditors agree to swap bonds for new notes, receiving 85 percent of existing bond claims. Bond insurers National Public Finance Guarantee Corporation, a unit of MBIA and Assured Guaranty, however, did not sign on.
PREPA said Wednesday that the insurers had agreed a deal which calls on them to provide a $462 million surety bond. That would fund a debt service fund that backstops an investment grade rating for the new bonds being issued under the bondholder deal, according to a source familiar with the deal.
Assured Guaranty said it will issue surety insurance policies of up to $113 million to support the deal.
The deal includes similar terms to the original bondholder deal such as PREPA receiving debt service relief of more than $700 million, a cut to PREPA's principal debt burden by more than $600 million. It sees a narrowing of the utility's cash projected cash deficit by more than $675 million.
It also calls for creditors to refinance $115 million of an interest payment due Jan. 1. Creditors are committing that if PREPA makes the payment in full on Jan. 1 they will purchase new bonds from PREPA of $115 million, the source said. PREPA owes $302 million on Jan.1 according to the utility's press office.
The deal requires enactment of necessary legislation, an investment grade rating for the new bonds and getting more bondholders to participate, the source said, as after the exchange offer, PREPA must not have any more than $700 million of the existing PREPA debt outstanding.
Reporting by Megan Davies; Editing by Sunil Nair and Stephen Coates