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Judge Orders Puerto Rico Utility and Creditors to Find Debt Deal

The Autoridad de Energia Electrica (AEE) power station in San Juan, Puerto Rico, on Tuesday, August 9, 2022. Puerto Rico's Electric Power Authority and its creditors will again have more time to negotiate a deal to slash $9 billion of debt as the judge overseeing the utility's bankruptcy extended the deadline by two weeks. Photographer: Jonathan Alpeyrie/Bloomberg (Jonathan Alpeyrie/Bloomberg)

(Bloomberg) -- The judge overseeing the bankruptcy of Puerto Rico’s electric utility directed the parties to reach a consensual debt-cutting deal through mediation and put a hold on most legal filings for at least 60 days to force the borrower and its creditors to focus on their negotiations.

US District Court Judge Laura Taylor Swain’s push for a broader resolution through mediation follows an appeals court ruling last month that increased bondholders’ allowable claims to about $8.5 billion from the $2.4 billion limit that Swain had placed on their unsecured lien on the utility’s net revenue.

The best interest of all parties lies in “a very substantially consensual” restructuring proposal, Swain told the Puerto Rico Electric Power Authority and its creditors Wednesday during a status conference.

“Work in good faith to reach a compromise starts immediately,” Swain said.

Prepa, as the utility is called, has been in bankruptcy for seven years and is seeking to reduce $10 billion of outstanding bonds and other obligations. Resolving that debt will allow the utility to focus on updating its aging infrastructure and improve service. Residents already pay some of the highest electricity costs in the US while living through chronic outages.

The stay of at least 60 days includes a halt on any potential litigation and also any amendments to Prepa’s existing debt-cutting proposal. Instead, Swain directed the parties to keep the people of Puerto Rico in mind and work toward a compromise.

“Movement is necessary to resolve this,” Swain said.

One development may help bridge the divide. While Prepa’s debt plan already included using contingent value instruments — which payout differently from a traditional fixed-rate security — the parties have been discussing how CVIs may entice more bondholders to agree to a deal.

“There might be a breakthough on CVIs,” Martin Bienenstock, a lawyer for Puerto Rico’s financial oversight board, which is managing Prepa’s bankruptcy, said during the conference.

Shelley Chapman, a former bankruptcy judge and the case’s lead mediator, expressed her doubts, saying the parties have yet to offer a proposal or deal or even a willingness to move closer.

“We have no reason to believe that either side is prepared to move enough to facilitate a realistic settlement,” Chapman said.

At the end of the conference, Swain urged the oversight board and the creditors to prove Chapman wrong and work together on a deal rather than prolong Prepa’s bankruptcy even further with litigations and appeals.

Prepa’s debt proposal has the support of a group of bondholders that includes BlackRock Inc. and Nuveen Asset Management LLC. But other creditors oppose that plan, including GoldenTree Asset Management, Assured Guaranty Corp. and an ad hoc group of bondholders that includes Invesco Ltd. and Goldman Sachs Asset Management LP.

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