(New throughout, adds background and analysis of negotiations with insurers)
By Nick Brown
SAN JUAN Oct 28 (Reuters) - Insurers of Puerto Rico Electric Power Authority bonds on Wednesday delivered terms for a debt restructuring to the utility, moving it a step closer to an accord with its last key creditor class, a person with direct knowledge of the matter told Reuters.
The insurers have been negotiating to provide a surety bond to serve as a reserve fund to effect a broader debt restructuring with the utility's other creditors.
Terms for the surety bond now need to be assessed by PREPA before a final deal can be struck.
A spokeswoman for PREPA and its chief restructuring officer, Lisa Donahue, declined to comment.
INSURERS WITH LEVERAGE
Insurers have taken center stage in talks to fix PREPA's balance sheet. Facing more than $8 billion in debt, PREPA reached deals in September with bondholders and lenders, who accepted 15 percent payment reductions in exchange for new bonds.
The Puerto Rican government has praised the deal as it undertakes similar restructuring talks with other creditors to reduce its $72 billion in total debt.
But the PREPA deal cannot work unless bond insurers, including Assured Guaranty and MBIA's National Public Finance Guarantee (NPFG), sign on.
When bondholders and lenders agreed to their deals, they did so on the premise that their new debt would be safer than the old, in part because PREPA would be required to maintain reserve funds.
The insurers are the ones negotiating to provide those reserves, in the form of a surety bond, a pot of liquidity they would guarantee, said the people close to the matter. Without the deal, talks could devolve into long, costly litigation.
Some remaining sticking points are economic, for example, the size and duration of the surety bond, said one source.
Another issue is governance. NPFG had criticized a proposed fiscal control board to oversee Puerto Rico's finances because the governor would appoint members without input from creditors, a second source said.
Changing the proposal is unlikely in practice, but the dispute underscores the credibility gap the government faces with creditors.
NPFG has taken the lead in restructuring talks, in part because it has more PREPA exposure than other insurers, with nearly $770 million in debt service due between 2016 and 2020, according to public documents. Assured, for example, has just $262 million in PREPA debt service through 2020, documents show.
Insurers are generally more resistant to concessions than bondholders because they guarantee debt at par, and are on the hook for losses. Bondholders, conversely, can acquire debt at discounts and still profit when principal values are cut.
NPFG, which faces its own financial struggles stemming from the global recession, has also been wary of making concessions at PREPA in part because it may have to make concessions to other Puerto Rican debt issuers, sources said.
In a note on Wednesday, Height Securities analyst Ed Groshans said bond insures are "at risk" of having to make payouts as soon as Jan. 1, when Puerto Rico could default on a $535 million payment of its general obligation debt.
PREPA, on the other hand, has been criticized by NPFG for refusing to raise rates on consumers, a move NPFG felt would have allowed it to pay its debt without a restructuring.
Representatives Assured and NPFG declined to comment. (Reporting by Nick Brown in San Juan; Editing by Lisa Von Ahn and David Gregorio)
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