By Ryan Rainey
April 5, 2016 at 6:11 pm ET
Lawmakers on the House Natural Resources Committee are preparing to publicly release their first round of changes to draft legislation on Puerto Rico’s debt crisis this week, Morning Consult has learned.
The new draft legislation could come out as soon as Wednesday, one source said. The release will come after a flurry of commentary and lobbying both from members of Congress and bondholder groups who have criticized two critical elements of the first draft of the legislation.
The original proposal would establish a fiscal oversight board and encourage voluntary agreements among creditors on debt restructuring. But it would not allow the commonwealth to file for Chapter 9 bankruptcy, as Democrats want.
The legislation’s debt restructuring language has seen pushback from creditor groups who say it goes beyond granting the island Chapter 9 bankruptcy authority, which they opposed. Creditors also object to what they see as unprecedented language to stay any litigation over Puerto Rico’s debt.
The bondholder groups are at odds over the merits of the bill, but they are mulling lots of options. Some creditors have proposed adding mechanisms known as “collective action clauses” to the debt restructuring language. Under these clauses, Puerto Rico’s government wouldn’t be able to stymie a majority of creditors if they vote “no” on a debt restructuring plan, according to a source close to the creditors’ thinking.
Adding this language would help avoid the type of “cram-down” situation that creditors have said they can’t accept under the current version of the bill. They are referring to language in the debt restructuring title that could force a revamped debt package on creditors, even if they don’t like the agreement.
This source said the mechanism would avoid a situation similar to the dispute between holdout creditors and the government of Argentina — a sovereign debt battle that has raged for more than a decade — by binding these holdouts.
That tool doesn’t have unanimous support, though. It has no precedent in U.S. law, according to Susheel Kirpalani, an attorney for Quinn Emmanuel representing a class of bondholders with the safest investments in the island. Instead, Kirpalani said, the clauses represent a carbon copy of European Union bankruptcy regulations.
Meanwhile, in San Juan, government officials appear to be growing increasingly concerned about the prospects for the bill in Washington. Puerto Rico’s legislature is considering legislation, which the commonwealth’s Senate passed early Tuesday, that would allow the governor to impose a temporary moratorium on all debt service payments.
The move could be a hedge in case Congress doesn’t clear legislation on the crisis in advance of Puerto Rico’s debt service payments that are due next month. There is some opposition from groups such as the Republican Study Committee that signal difficulties in the House. The island’s legislation has come under intense fire from many of the same bondholder groups that have criticized the House legislation.
The House is expected to begin acting on the draft bill next week when it returns from its spring recess, but the path forward for the Senate bill remains unclear. The Senate plans to begin its appropriations season this spring, and a Puerto Rico bill likely would have to clear that chamber before those dozen bills come up for a vote.
Key senators appear to be holding their fire on the bill. Sen. Orrin Hatch (R-Utah), the chairman of the Finance Committee and an active participant in the Puerto Rico issue, signaled that the Senate debate is more partisan than the bipartisan solution that’s forming in the House.
He also sidestepped a question about whether he thinks the debt restructuring title under the current House bill needs to be changed. “I don’t think the bondholders should be mistreated,” he told reporters Tuesday. “They should be treated fairly. They invested fairly, and they should be treated fairly.”
He added the fiscal control board that the bill establishes “ought to have the ability to work with everyone.”
“That’s what a control board is for,” he said.
Ryan Rainey previously worked at Morning Consult as a reporter covering finance.