Photographer: Derick E. Hingle/Bloomberg

Congress Caught in the Middle on Puerto Rico

Debtholders are lobbying to make sure they get paid first.

For months, Republicans in Congress have stalled proposals to prevent a financial collapse in Puerto Rico, which is staggering under $70 billion in debt. The latest delay? Conflicting demands from competing groups of bondholders, who are lining up on opposite sides of a bill that would let the island territory write off some of its burden. Hedge funds and other investors who own about $5 billion of Puerto Rico’s general obligation bonds, which are guaranteed under the island’s constitution, are pushing for revisions to the proposed measure. Firms that own $1.6 billion in securities backed by sales taxes favor the legislation, which includes provisions for an independent oversight panel that would help keep Puerto Rico’s economy afloat.

The House Committee on Natural Resources, which has been tasked by House Speaker Paul Ryan with working out a compromise, abruptly canceled an April 14 vote on the draft legislation so it could be revised. The House Freedom Caucus, a group of about three dozen conservative legislators, huddled on April 18 to discuss their stance. According to a participant who spoke on the condition he not be identified, the group wants assurances that the bill will treat different classes of creditors fairly. “The conflicting messages that lawmakers are getting from investors is making them less likely to want to be seen picking one creditor group over another,” says Daniel Hanson, an analyst at Height Securities, a Washington-based broker-dealer. “There are disagreements among House members over which credits are strongest and what’s the right way to proceed.”

The legislation initially released by the committee would allow a federal board to weigh in on Puerto Rico’s budgets, oversee debt restructuring, and put bondholder lawsuits temporarily on hold. Puerto Rico is facing bond payments it may not be able to make in May and July. Governor Alejandro García Padilla has pushed Congress to grant him the right to restructure the island’s debt in court. In its most recent proposal, Puerto Rico said it would pay 74¢ on the dollar for general obligation and government-guaranteed debt and 57¢ for sales tax securities.

General obligation bondholders have hired Connie Mack, the former Republican representative from Florida, to lobby on their behalf. The House bankruptcy legislation “would violate the priority given to general obligation bonds under Puerto Rico’s constitution,” Andrew Rosenberg, a lawyer at Paul, Weiss, Rifkind, Wharton & Garrison, which is representing the general obligation bondholder group, said in a statement.

That group is squaring off against investors in sales tax-backed securities. Judd Gregg, a former Republican U.S. senator from New Hampshire, is advising the securities’ holders, who are concerned that Puerto Rico may redirect sales tax revenue to help pay other expenses and would prefer to see an independent oversight board in charge. “We feel that the chances of our property rights being properly respected are greater in the hands of disinterested, dispassionate control board members,” says Susheel Kirpalani, a partner at Quinn Emanuel Urquhart & Sullivan, which is representing holders of sales tax debt.

Representative Rob Bishop, a Utah Republican who chairs the Natural Resources Committee, says final legislation might not make it to the floor until May, but he’s confident Ryan will be able to rally Republicans around a solution: “I think we’re going to get a majority.”
With James Rowley

The bottom line: Competing claims on Puerto Rico’s $70 billion debt is slowing congressional efforts to avert fiscal collapse.

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