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(Updates with analyst quote and terms of agreement)
NEW YORK, Aug 14 (Reuters) - Puerto Rico's electric power authority PREPA struck a deal with bondholders on Thursday to develop a restructuring plan to revive the debt-stricken utility as it won an extension of vital lines of credit it uses to buy oil.
PREPA is widely viewed to be in the weakest condition of Puerto Rico's highway, water and electricity agencies. A restructuring of its debt, moving to cheaper fuel and cutting jobs are seen as ways to ensure longer-term health of the utility.
Under the terms of Thursday's deal, bondholders and insurers holding more than 60 percent of its bonds gave PREPA the go-ahead to develop a restructuring plan by March 2, 2015. It pledged to appoint a chief restructuring officer by Sept. 8.
Thursday's deal includes bondholders currently suing Puerto Rico over a new law that provides a legal framework for some public corporations to enter a bankruptcy-type process, PREPA said. Oppenheimer Funds, Franklin Templeton Investments and hedge fund Blue Mountain have sued to annul the act.
Crucially, bondholders will receive payments on interest and principal during the period that covers a $209 million debt coupon payment in January. However, it was unclear whether a restructuring plan would involve a writedown of PREPA's debt.
"The mutual funds have no other options, they're very limited in what they can do," said Chris Ryon, head of Thornburg Funds' municipal bond team. "The best thing they could do is realize we have to restructure now and do it while they still have all their assets."
PREPA was on the hook for $146 million from Citigroup Inc and $525 million from a consortium led by Scotiabank . It had already gained a two-week extension to the credit lines that expired on Thursday.
Of the Scotiabank credit line, Oriental Bank holds $200 million, Banco Popular de Puerto Rico holds $75 million, First Bank holds $75 million, with Scotiabank holding the remainder, said a finance industry executive.
Oriental and First Bank declined to comment. Banco Popular confirmed it is part of the syndicate. Scotiabank did not respond to a request for comment.
The authority will pay an interest rate of ABR (Alternate Base Rate) plus 4 percent under the agreements, PREPA said. Its bank credit lines are now extended to March 31.
Further shoring up PREPA's finances, the Government Development Bank said it will not require PREPA to make interest or principal payments on its loans to PREPA. The authority will be able to use $280 million in its construction fund for "current expenses and capital improvements."
The core of PREPA's problems is that it uses high cost oil to generate electricity. PREPA spends almost two-thirds of its operating budget, or $2.6 billion, on oil. Electricity prices on the island are double those in the mainland United States.
Reporting by Ed Krudy, Luciana Lopez and Megan Davies, editing by G Crosse, Richard Chang and Ken Wills