- Modest changes made to House bill’s provision on control board
- Delays likely push House floor debate back to early June
The U.S. Congress took a big step toward finally addressing Puerto Rico’s debt crisis, though Republican and Democratic leaders now face the difficult task of holding together a fragile coalition to support the plan.
The breakthrough support -- from the Obama White House as well as Republicans in Congress -- gives the plan for a new control board to oversee the territory’s finances a strong chance of success. The compromise represents a ray of hope for an island that has already defaulted on some of its $70 billion in debt and faces another $2 billion payment on July 1.
First, however, Speaker Paul Ryan needs to get it through the House.
Conservatives remain skeptical and several Democrats, including presidential candidate Bernie Sanders, blasted the measure that they said would treat Puerto Rico as little more than an American colony.
But Ryan’s chances of success went up dramatically Thursday as U.S. Treasury Secretary Jacob J. Lew and House Democratic leader Nancy Pelosi signed on to the compromise bill released late Wednesday.
The reception from the bond market was also warm for a deal, which Keefe, Bruyette & Woods analyst Charles Tyson characterized as “modestly positive for creditors on the whole.”
The legislation would create a new financial control board to manage a debt restructuring, as well as to oversee the island’s finances. The control board would have the authority to ask a judge to order a forced restructuring if Puerto Rico’s government can’t reach a deal with bondholders.
The board would also be able to enforce balanced budgets on the territory’s government and force the sale of government assets if necessary. The bill contains no additional taxpayer funds to cover debt payments.
Lew praised the newly revised measure as a "fair, but tough bipartisan compromise."
"We encourage lawmakers to act without delay,” Lew said in a statement Thursday. The bill could go to the House Natural Resources Committee next week, with the full House voting in early June.
It would also need to be passed by the Senate, where it could encounter some headwinds. Sanders of Vermont blasted the House bill, contending it would treat Puerto Rico "like a colony."
“This undemocratic board would have the power to slash pensions, cut education and health care and increase taxes on working families in Puerto Rico," Sanders said in a statement. "That is unacceptable."
Ryan told reporters Thursday that "we got this bill exactly where we wanted it," saying that negotiators made sure the measure doesn’t establish damaging precedents for bondholders.
Still, many Republicans remain skeptical of the deal, meaning the speaker will likely have to personally persuade them to vote for the bill.
"I am going to have to look real closely at the collective action provisions, because I am very leery about changing rules in the middle of the game," said Representative Doug Lamborn, a Colorado Republican who sits on the Natural Resources Committee.
He said that he worried about debt-restructuring language he said could create a situation where "some of the debtors, if enough of them qualify under the percent requirement, can dictate what happens to their hold-outs." Another committee member, Don Young of Alaska, also declined to say he’s ready to support it.
Representative Jim Jordan of Ohio, chairman of the ultra-conservative House Freedom Caucus, told reporters that his "big concern" was that language should be included to make sure pensions don’t jump to the front of the line for being repaid "because that could mess up the bond market."
House Natural Resources Chairman Rob Bishop said he is working to assuage conservatives who are concerned a federal intervention into the commonwealth’s financial affairs could be seen as a bailout.
"I’m happy," said Bishop of Utah.
The White House said it would push for passage of the bill, even though it contained a provision that would lower the island’s minimum wage in some cases. "We are prepared to encourage Congress to pass a piece of legislation even if it’s less than perfect," White House Press Secretary Josh Earnest told reporters Thursday, urging lawmakers to "stand firm against the special interests attempting to undermine this legislation."
Creditors could benefit from some of the latest changes to the bill because the board and a court would have to approve a restructuring that honors existing rights and remedies of Puerto Rico’s various bonds. About 17 different commonwealth entities sold debt repaid with different legal pledges and revenue streams.
While the bill doesn’t list the order of priority of repayment among those credits, any restructuring would have to adhere to the constitutional guarantee on general-obligation bonds or the rights of senior sales-tax investors to get first claim of sales-tax revenue, said Height Securities analyst Daniel Hanson.
The bill also protects any existing, voluntary restructuring agreements between a commonwealth agency and its creditors. That means the measure wouldn’t conflict with the Puerto Rico Electric Power Authority’s plan to restructure $9 billion of debt with bondholders accepting losses of 15 percent through a debt swap.
The earlier version of the bill would have authorized the transfer of federal control of a national refuge on the island of Vieques back to the Puerto Rico government. That drew concerns and objections from environmentalists and Democrats that the land would be developed and jeopardize the wildlife there, and is being dropped in the revised version.
One of the final sticking points in the negotiations was a tussle between House Republicans and Treasury officials over how members would be appointed to the new control board. Bishop said the new bill envisions the president selecting its members from a list provided by top members of Congress or else subjecting his own different picks to Senate confirmation. The president must select from the congressional list if he doesn’t make his own selections by a date in September.
Those details, as well as other elements of the bill text, could still be changed when the committee formally takes up the bill, which could happen as early as next week. Bishop says the bill could reach the floor of the House next month after lawmakers return from a Memorial Day recess.
"Any future changes will be done in public committee meetings," Bishop said in a statement Wednesday night.
Puerto Rico and its creditors need a resolution, said Daniel Solender, who oversees $19 billion as head of municipals at Lord Abbett & Co. in Jersey City, New Jersey.
“It’s very positive that they came to an agreement,” Solender said. “That’s a huge step and something that is necessary.”
Congress has already blown past one debt payment deadline on May 1, when the island defaulted on $370 million in bond payments. Now, an even heftier $2 billion payment by Puerto Rico comes due on July 1, and Governor Alejandro Garcia Padilla has warned that the commonwealth doesn’t have the money to make that payment in full. That amount will include more than $700 million in general-obligation bonds that are supposed to be guaranteed under the island’s constitution.
The next major deadline is January, when general-obligation interest is due again.
The gravity of the commonwealth’s crisis was underscored earlier Wednesday, when Garcia Padilla began suspending the transfer of toll-road revenue to bondholders, in the administration’s latest attempt to preserve cash for essential services.
The island’s deteriorating finances are getting stepped-up attention as the debate gears up. Lew and Representative Raul Grijalva, the Natural Resources panel’s top Democrat, both traveled to Puerto Rico this month to highlight how the crisis is affecting residents there.
Hillary Clinton and Sanders also are giving some focus to the crisis in advance of Puerto Rico’s June 5 Democratic presidential primary. Sanders visited this week and he urged the Federal Reserve to help the commonwealth restructure its debt and denouncing proposed austerity measures.