Bermuda-based bond insurer Assured Guaranty has struck a deal with Puerto Rico’s indebted electric company and its bondholders that will enable the utility to restructure about $8.2 billion of debt.

The Caribbean island, a US territory, faces a mounting fiscal crisis and the deal marks a first step to reduce its financial obligations.

The deal has been described as the largest restructuring in the history of the $3.7 trillion municipal bond market.

The agreement brings together the Puerto Rico Electric Power Authority, the largest US public-power provider, insurers and others such as hedge funds that hold 70 per cent of its debt, the agency, known as Prepa, said in a statement.

Prepa’s obligations would be cut by more than $600 million, with investors taking losses of about 15 per cent in a debt exchange. The transaction aims to free up cash so the utility can modernise plants. The pact requires that lawmakers approve the deal by January 22.

The deal includes bridge financing to enable Prepa to avoid defaulting on its $196 million January 1 interest payment. Assured Guaranty said its share of the bridge financing was about $15 million.

Assured Guaranty’s chief executive officer Dominic Frederico said: “We believe the restructuring transaction outlined in the restructuring support agreement can be the foundation for a consensual settlement that fosters modernisation, long-term sustainable rates for ratepayers and continued access to efficient capital markets financing for Prepa.

“We are committed to continue working cooperatively with Prepa and other stakeholders to implement the terms of Prepa’s recovery plan.”

Among US states, only California and New York have more debt that the $70 billion owed by Puerto Rico, which has a population of 3.5 million. Governor Alejandro Garcia Padilla is seeking to reduce that debt load by asking investors to take losses.

Lisa Donahue, Prepa’s chief restructuring officer, said of the restructuring deal: “It gives us liquidity, it gives us breathing room.

“It gives us cash to invest in infrastructure and to provide, ultimately, sustainable clean power for Puerto Rico,” she told Bloomberg News.

In a statement, Assured Guaranty added: “To facilitate the securitisation transaction, which enables Prepa to achieve debt relief and more efficient capital markets financing, Assured Guaranty will issue surety insurance policies in an aggregate amount not expected to exceed $113 million in exchange for a market premium to support a portion of the reserve fund for the securitisation bonds.”

Assured’s shares rose 3 per cent in New York trading on Christmas Eve after the deal was announced.