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Hedge Funds Campaign For Puerto Rico Power Authority Debt Relief

NEW YORK (The Deal) -- As the Puerto Rico Electric Power Authority faces a Thursday forbearance agreement expiration and a daunting Aug. 14 debt maturity, an ad hoc group of 19 hedge fund bondholders is evaluating ways to provide financing and support to the commonwealth, including providing debtor-in-possession financing, according to some sources.

One source following the situation said the ad hoc group is meeting with Puerto Rico's financial advisers at Millco Advisors LP soon to "orchestrate a campaign" for the hedge funds to support the new restructuring framework that was signed into law on June 28.

A different source familiar with the situation contended that the ad hoc group is focused on supporting Puerto Rico in its efforts to reduce its debt load while preserving the pledge of Puerto Rico's good faith, credit and taxing power for four types of bond issuances -- general-obligation bonds issued by the commonwealth, as well as debt issued by the Government Development Bank for Puerto Rico, the Public Buildings Authority, and COFINA, an issuer that's backed by sales taxes.

The source said the ad hoc group is "broadly supportive of Puerto Rico's efforts to protect those four bonds. ...The group's position is not tied to the recovery act."

Puerto Rico's recovery act provides a framework for government-owned corporations to restructure their debt. No such possibility existed before, since Puerto Rico and its public agencies are prohibited from filing for Chapter 9 bankruptcy.

Officials at Millco didn't respond to requests for comment.

Robert Donahue, a managing director at muni credit resesarch firm Municipal Market Advisors, believes the hedge funds in the ad hoc group are interested in possibly providing a DIP loan that could help PREPA restructure under Chapter 3 of the new act.

PREPA's role as a "distressed issuer that provides an essential service" is enticing for hedge funds that are looking for outsized returns in a shorter timeframe, Donahue said by phone.

The key would be inking a deal to provide super-senior financing with strong creditor protections.

"Certainty of getting paid when PREPA restructures its old debt and begins the process of diversifying its fuel sources - that's what is appealing to them," Donahue said.

A spokesman for the ad hoc group responded, "We are exploring all potential financing possibilities that could help support the Puerto Rico government in some of its initiatives, and ensure that four types of debt - GO, GDB, PBA and COFINA - are safeguarded."

PREPA's biggest operational problem is its high fuel cost.

Sources believe the turnaround case rests on the utility's efforts to convert oil-fired power generation plants to use natural gas and renewable sources, which would significantly reduce its operating costs and improve its financial performance.

PREPA's forbearance agreement with its bank lenders expires on July 31, and it is unclear whether or not the agreement will be extended.

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