Half-finished houses of the Molinos de Rios housing development stand abandonded after the owners declared bankruptcy, in Toa Alta, Puerto Rico. (Alvin Baez/Reuters)

Puerto Rico’s electric utility reached a tentative agreement with insurance companies MBIA and Assured Guaranty, along with some bondholders, to restructure the utility’s $8.2 billion of debt, according to two people with knowledge of the discussions.

The accord sets into motion what would be the largest-ever restructuring in the $3.7 trillion municipal-bond market and potentially averts a default on $196 million of interest due Jan. 1. Under the pact with the Puerto Rico Electric Power Authority, called Prepa, the insurers will provide about $450 million in the event of a default through what’s known as a surety bond, according to the people, who asked for anonymity because the negotiations are private. Prepa may execute a debt-exchange in the second quarter, one person said.

It took more than a year of fitful negotiations for Prepa to strike a deal with bondholders, who in November agreed to take losses of 15 percent. The protracted process for the utility shows the difficulty Puerto Rico faces in seeking to persuade investors to accept less than they are owed on Puerto Rican bonds, which were sold by more than a dozen agencies. Gov. Alejandro Garcia Padilla said this week that the commonwealth will default as soon as January because it has run out of cash.

“This suggests it’s possible to do it without Chapter 9,” said Daniel Solender, who oversees about $17 billion in debt, including commonwealth securities, as head of municipal debt at Lord Abbett & Co. in Jersey City, N.J.. “It suggests there is the possibility of negotiating with bondholders.”

The parties reached an agreement Thursday after Lisa Donahue, Prepa’s chief restructuring officer, flew from Puerto Rico to New York to craft a plan before an existing bondholder deal expired, one person said. Prepa will make its Jan. 1 debt payments, which will be refinanced by the bond insurers, the person said.

“It’s a boost for the idea of a Prepa restructuring, either in the current format or another format,” said Matt Fabian, a partner at Municipal Market Analytics.

Jose Echevarria, a spokesman for Prepa in San Juan, and Dan Zacchei of Sloane & Co., a representative of Prepa bondholders in New York, declined to comment on the tentative agreement. The agency sent a statement Friday saying the existing bondholder agreement had been extended through the day.

Greg Diamond, a spokesman for MBIA’s National Public Finance Guarantee Corp., and Michael Corbally, a spokesman for Syncora Guarantee, another insurer of Puerto Rican bonds, declined to comment on the tentative pact. Ashweeta Durani, spokeswoman for Assured Guaranty, didn’t immediately respond to phone messages and emails.

Bloomberg News