Franklin, Oppenheimer Say Prepa Has Options to Pay Debt

Funds managed by Franklin Templeton Investments and Oppenheimer Funds Inc. want to add claims to a suit challenging Puerto Rico’s debt-restructuring law that show how a utility could meet its obligations without cutting debt at investor expense.

The restructuring law, passed under threat of a “fiscal emergency,” would allow public utilities to negotiate with bondholders to cut their debt loads, potentially forcing investors to accept unfavorable terms, according to the investment funds, which hold about $1.6 billion in Puerto Rico Electric Power Authority bonds.

The funds asked a San Juan federal judge to add to their June lawsuit to show that the power authority has other ways to salvage its finances apart from restructuring, including collecting more than $640 million in bills owed by the commonwealth, raising rates and cutting costs.

“The ease with which the numerous alternative solutions could be implemented underscores that the Recovery Act is not reasonable or necessary to serve any public purpose,” the funds said in a copy of their proposed new complaint.

Puerto Rico has asked a judge to throw out the lawsuit, claiming that the law is a “valid exercise” of its power and that the power authority lacks other options because it isn’t eligible to reorganize its finances under Chapter 9 or Chapter 11 of the U.S. Bankruptcy Code.

File ‘Imminently’

Along with seeking to expand their complaint, the funds also asked a judge to rule that the new law violates the U.S. Constitution by delaying federal court proceedings. Prepa, struggling with $10 billion of debt, may “file for relief under the act imminently,” investors alleged.

BlueMountain Capital Management LLC has also sued to block the new Puerto Rico law. The New York-based investment firm holds more than $400 million in bonds issued by Prepa. Both cases are before U.S. District Judge Francisco A. Besosa.

The cases are Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, 14-cv-01518; and BlueMountain Capital Management LLC v. Garcia-Padilla, 14-cv-01569, U.S. District Court, District of Puerto Rico (San Juan).

Before it's here, it's on the Bloomberg Terminal.