Bondholders say Puerto Rico authority has options to prevent default

Mon Aug 11, 2014 10:07pm EDT

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P - Mutual funds suing Puerto Rico over a new restructuring law filed an amended complaint on Monday that details ways the island's electric power authority PREPA could meet its obligations without defaulting on its debt.

The funds managed by Franklin Templeton Investments and Oppenheimer Funds sued the U.S. commonwealth in June after it passed the new law, known as the Recovery Act. The law gives some of the island's public corporations a legal framework for bankruptcy-like procedure.

The Franklin Templeton-led plaintiffs said in June the law violated the U.S. Constitution by effectively allowing Puerto Rico to impair certain contracts. They also alleged that the power to make bankruptcy law rests solely with the U.S. federal government.

The funds hold about $1.7 billion of Puerto Rico debt. The amended complaint argues that PREPA has other "less drastic" alternatives open to it, including raising electricity rates, collecting over $640 million owed to it by the commonwealth, cutting contributions to municipalities, and cutting staff.

"Each of these alternatives represents a less drastic solution for the problem the Recovery Act purports to correct. And in each case, the defendants could implement that solution without impairing the contractual rights of the plaintiffs and all holders of PREPA bonds," the complaint said.

Puerto Rico has asked the court to dismiss the lawsuit as premature. (Reporting by Edward Krudy; Editing by Ken Wills)

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