Puerto Rico Debt Legislation: Where It Stands in Congress

Republican leaders ran into a familiar stumbling block last week when they tried to advance their bill to address Puerto Rico’s debt crisis: their own lawmakers.

Beachgoers soak up the sun in San Juan, Puerto Rico. PHOTO: KRISTI EATON/ASSOCIATED PRESS

Beachgoers soak up the sun in San Juan, Puerto Rico. PHOTO: KRISTI EATON/ASSOCIATED PRESS

The Wall Street Journal – Republicans called off a committee vote on the Puerto Rico bill at the last minute, blaming the delay on Democrats and the Obama administration, who they said had requested more time to negotiate.

Still, after House GOP leaders held their own closed-door conference on the bill on Friday morning, lawmakers backing the bill conceded they still had more work to do to convince colleagues that it didn’t amount to a bailout of the commonwealth. Groups allied with the island’s creditors have ramped up a lobbying blitz to undermine the bill by characterizing it as a bailout even though it wouldn’t require any taxpayer dollars.

The delay is a sign that House Speaker Paul Ryan still hopes to get a bipartisan bill, rather than simply push ahead a partisan bill that probably wouldn’t become law.

Puerto Rico has been in recession for a decade, and the island says its economy will soon deteriorate further because it can no longer afford to pay some of the $72 billion in debt it has taken on. The bill in Congress would create a federal board to provide fiscal oversight, give the island a temporary legal stay against lawsuits from creditors, and create a mechanism for the island to restructure its debts. Because Puerto Rico isn’t a state, it can’t seek the normal bankruptcy court protections afforded to troubled municipalities in the rest of the U.S., and because it isn’t a country, it can’t go the International Monetary Fund for assistance.

Making matters more complicated, the island has nearly a dozen different classes of debt, each with different security pledges that make some classes more senior than others. Also, the island’s pension system is grossly underfunded.

The Treasury Department has been pushing for legislation that would make it easier to restructure the debt and says only Congress can create an orderly framework to resolve debt because Puerto Rico’s public entities, unlike those in U.S. states, don’t have access to bankruptcy protection.

Years of litigation, Treasury officials say, will further starve investment from Puerto Rico’s economy. Treasury officials last week said the current version of the bill isn’t workable because its technical provisions could allow creditors to string along the restructuring process. Democrats are likely to take their cues from the Treasury on this, so they remain a key constituent.

Creditors don’t like the idea that their debts could get restructured, and they are jockeying among themselves and with the island’s financial representatives to secure the most favorable outcome possible. Bondholders are worried that the legislation will treat them unfairly by, for example, using a restructuring process to shore up the island’s unfunded pensions.

Some bondholders have been working closely with the Republican Study Committee, a very influential and large group of House conservatives, to steer the bill away from allowing broad restructuring authority.

A group of creditor representatives or their lawyers—including mutual funds OppenheimerFunds and Franklin Advisers and bond insurers Assured Guaranty and Ambac Financial Group—held a marathon six-hour negotiating session last Wednesday with staffers from the Republican Study Committee and the House Natural Resources Committee to address concerns about the bill, according to people familiar with the meeting.

The bottom line: the fight to write the rules over how to resolve potential defaults on the island is about leverage. Treasury and Puerto Rico want a process that makes it easier to restructure debts because this will give the island more leverage in any negotiations with bondholders. Creditors want a bill that makes it very hard—or impossible—to restructure debts or void contracts because this preserves their leverage.
Mr. Ryan is caught in the middle of this. He has strongly supported the legislative effort and is trying to reach a bipartisan deal, but as bondholders lobby against the bill, he risks losing Republicans in the process.

“You’ve got all these ads saying this is a bailout. There’s no taxpayer money going to it,” said Rep. Raul Labrador (R., Idaho), who said he spoke at last Friday’s closed-door meeting of House GOP lawmakers and was leaning in favor of the legislation.

“My fear, and I think it’s a pretty well-founded fear, is that if we don’t give them the tools, there will be a bailout request because they’re going to go under,” said Mr. Labrador, who is a member of a separate group of more conservative lawmakers called the House Freedom Caucus.

House Natural Resources Committee Chairman Rob Bishop (R., Utah) said Friday he didn’t think modifications to the bill would be finished in time to schedule votes this week. With a major bond payment looming in two weeks, Mr. Bishop wants a bill ready “as soon as humanly possible,” he said. “If we all can’t get together by May 1 and there is [a default] and all of a sudden creditors start suing again, maybe this will reinforce that this is a serious issue.”

Apr 18, 2016 2:34 pm ET

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