Puerto Rico's Power Company Debt Crisis: A Cautionary Tale for Emerging Market Bondholders

The Puerto Rico Electric Power Authority (PREPA) debt crisis has evolved into a textbook case of systemic risk in municipal infrastructure bonds, offering critical lessons for emerging market bondholders and high-yield credit strategists. As of 2025, PREPA remains mired in a Title III restructuring under PROMESA, with $8.5 billion in secured claims and a debt burden that has shrunk from $28.2 billion to $24.1 billion since 2017. Yet, the utility's financial instability—marked by 36 of the last 49 months of negative cash flows—has raised alarms about the broader implications for infrastructure bonds and the resilience of credit markets in high-risk jurisdictions.

The PREPA Paradox: Debt vs. Infrastructure

PREPA's debt crisis is not merely a financial issue but a structural one. The utility's revenue streams are strained by inefficient operations, poor bill collection, and a grid in dire need of modernization. Despite federal funds earmarked for repairs, bondholders—led by firms like BlackRock and Nuveen—demand repayment of $3.7 billion in unaudited net revenues, even as PREPA's liquidity sits at a mere $1.45 billion. This misalignment of priorities highlights a dangerous trend: when creditors prioritize short-term repayment over long-term infrastructure investment, the result is a vicious cycle of declining service quality, higher costs for ratepayers, and eroded economic growth.

The June 2024 First Circuit Court ruling, which affirmed bondholders' liens on PREPA's current and future net revenues, has further tilted the balance of power toward creditors. This precedent could reshape how revenue-backed bonds are structured globally, incentivizing investors to demand stronger collateral terms while municipalities face pressure to divert funds from critical infrastructure. For emerging market bondholders, this signals a shift in risk dynamics: the enforceability of future cash flows in revenue bonds may now carry higher legal certainty, but at the cost of public welfare and long-term fiscal sustainability.

Systemic Risks in High-Yield Credit Strategies

The PREPA crisis underscores three systemic risks for high-yield credit strategies:
1. Legal Uncertainty and Political Interference: The recent removal of five members of the Financial Oversight and Management Board (FOMB) by the U.S. federal government has introduced volatility into Puerto Rico's restructuring process. This highlights how external political interventions can disrupt long-term bondholder expectations, particularly in jurisdictions with complex governance structures.
2. Cost Overruns and Inefficiencies: Puerto Rico's restructuring has cost over $2 billion in legal and consulting fees—far exceeding initial budgets. Such costs could become a norm in large-scale municipal bankruptcies, raising borrowing costs and reducing investor confidence in markets where transparency is lacking.
3. Infrastructure Neglect: Forcing PREPA to prioritize debt service over grid modernization risks exacerbating Puerto Rico's energy crisis. With reliability metrics 8–13 times worse than the U.S. average, the island's economic recovery hinges on infrastructure investment. Yet, bondholders' demands threaten to delay critical upgrades, creating a feedback loop of declining productivity and higher debt servicing costs.

Lessons for Emerging Market Bondholders

For investors in high-yield municipal and emerging market bonds, the Puerto Rico case offers three key takeaways:
1. Due Diligence Beyond Financial Metrics: Traditional credit models often overlook governance quality and institutional capacity. Puerto Rico's crisis revealed how opaque procurement practices, weak fiscal discipline, and political dependencies can undermine even the most robust debt structures. Investors must now incorporate political risk assessments and transparency metrics into their analyses.
2. Diversification and Hedging: The PREPA crisis demonstrates how a single entity's debt can ripple across entire markets. Emerging market bondholders should diversify across sectors and geographies, avoiding overexposure to revenue bonds in jurisdictions with weak institutional frameworks.
3. Advocacy for Equitable Restructuring: The prioritization of bondholder claims over infrastructure needs in Puerto Rico has drawn criticism from policymakers and civil society. Investors with a long-term horizon should advocate for restructuring frameworks that balance creditor rights with public welfare, ensuring that debt service does not come at the expense of economic resilience.

The Road Ahead

As Puerto Rico's restructuring enters its final stretch, the outcome will set a precedent for how municipalities and emerging markets manage debt crises. For bondholders, the key question is whether the focus on creditor rights will lead to a more stable credit environment or exacerbate systemic vulnerabilities. The answer lies in the balance between legal enforceability and fiscal sustainability.

Investors must also recognize that the Puerto Rico crisis is not an isolated event. Similar challenges loom in other high-yield markets, from underfunded infrastructure projects in Latin America to municipal debt in U.S. cities facing climate-related risks. The lessons from PREPA—about governance, transparency, and the interplay between debt and infrastructure—will remain relevant for years to come.

In the end, the Puerto Rico story is a reminder that credit risk is not just about numbers on a balance sheet. It's about the institutions, policies, and people behind them. For emerging market bondholders, the path to resilience lies in understanding these dynamics—and acting accordingly.