SAN JUAN, Puerto Rico, July 30 (Reuters) - Puerto Rico’s troubled electric power authority may dip into a construction fund to pay for vital oil shipments if talks with banks to extend $671 million in loans are unsuccessful, according to people familiar with the situation.
The banks are asking for a much higher interest rate to extend the loans than the authority, known as PREPA, has been paying so far, said one lobbyist, who has been discussing the matter with both government officials and investors in Puerto Rico bonds. The lobbyist could not be identified because of client confidentiality concerns.
In one potential deal, banks would extend loans until the end of the year at an interest rate equal to the London Interbank Offered Rate, or LIBOR, plus 9 percentage points, the lobbyist said. That would equate to about 9.24 percent based on the current level of LIBOR’s benchmark three-month rate.
The status of the talks was unclear late Wednesday, but some analysts and Puerto Rico investors said they expect the credit lines to be extended in some form.
“I don’t think those lenders are going to want to be the ones that force an insolvency filing under an untested new law whose constitutionality is being questioned,” said David Tawil, president of Maglan Capital, a hedge fund that owns Puerto Rico’s general obligation debt.
Still, PREPA is widely expected to restructure more than $9 billion in debt after the U.S. Commonwealth passed a law in June that gave the island’s public authorities a legal framework to enter a process similar to a U.S. bankruptcy.
PREPA has a $250 million credit line with Citigroup and a $550 million line with a syndicate led by Scotiabank. About $671 of that is currently outstanding. Of that, $146 million is due to Citigroup on Thursday. The loan from the Scotiabank syndicate expired through the end of August.
PREPA did not release the terms of the forbearance agreement it reached with lenders on July 7, and it is unclear if banks could foreclose on the entire amount due.
Both Citigroup and Scotiabank declined to comment on the loans, citing client confidentiality. PREPA initially agreed to pay LIBOR plus 2.25 percent to 2.80 percent for its credit lines, according to a 2013 annual report. The loan facility with Citigroup has been extended since then but PREPA has not disclosed any new terms.
“At this point I think we are all operating in a little bit of a vacuum of information,” said Dennis Pidherny, a PREPA analyst at Fitch Ratings. “It is really entirely up to the banks and it’s hard to predict.”
PREPA uses the credit lines to buy oil from its supplier Brazil’s Petrobras and their loss could complicate its operations even if it is able to tap existing funds to pay for operating expenses in the short term.
Officials at the authority have also talked to bondholders about using its construction fund to pay for operations and oil purchases until the year’s end. That would give PREPA more time to negotiate with banks, according to a finance industry executive who formerly worked in the Puerto Rico government.
The authority held a board meeting on Tuesday but has so far declined to disclose details of the negotiations.
“We are in discussions with our creditors and providers in light of our current financial situation”, PREPA Executive Director Juan Alicea Flores said Wednesday in a prepared statement. “We will be sharing updates to our action plan and the steps we will take as new information rises.”
PREPA uses expensive oil generators to produce electricity and is reliant on oil shipments. It needs to come up with an arrangement that would push back its need to file for protection under a new Puerto Rico law until the end of the year.
Using the construction fund to pay for operations would not be unprecedented. PREPA borrowed $100 million from the fund in late May to make a $60 million oil purchase. The board approved the loan on the condition that it be paid back in 30 days.
Some PREPA bonds have recovered after trading as low as 35 cents on the dollar. Still the slide in the Commonwealth’s bonds has weighed on some mutual funds. Franklin Resources Inc said on Wednesday investors withdrew $400 million from its municipal bond funds in the latest quarter, a trend that may continue in the short term on worries over Puerto Rico. The company’s stock slid 1.8 percent on the day. (Writing by Edward Krudy Reporting by Reuters in San Juan; editing by Andrew Hay)