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House Republicans released a draft of a rescue plan for Puerto Rico yesterday that they hoped could quickly garner bipartisan support and win over skeptics on the island, on Wall Street and in Congress, the New York Times reported today. The plan, being drafted by Republicans on the House Natural Resources Committee, in consultation with Democrats in Congress and the Treasury Department, calls for putting Puerto Rico’s finances under a presidentially appointed oversight board — a bitter pill to many on the island. The plan would also establish guidelines for restructuring some portion of Puerto Rico’s $72 billion of debt, “where necessary.” While Puerto Rico would not be granted standing to seek relief in bankruptcy — something its leaders wanted — it could get some of the legal tools found in bankruptcy as long as it first jumps through a number of hoops. To some on the island, any federal oversight board at all is a deal-breaker. Shortly after a summary of the committee’s approach began to circulate late last week, the governor of Puerto Rico, Alejandro García Padilla, denounced it as “shameful and degrading,” and something that would deprive the island “of its own government.” The president of the Puerto Rican Senate, Eduardo Bhatia, said upon reading the proposal that he was deeply offended by the way it was written, which he said “was from the 18th century,” evoking “the worst colonial subjugations.” Read more. 

In related news, some of Puerto Rico’s largest creditors, unsatisfied with a commonwealth debt-reorganization proposal and the direction of congressional legislation, are working together to draft their own restructuring plan, Bloomberg News reported yesterday. Representatives of bondholder groups and bond insurance companies met on Monday at the New York office of PJT Partners Inc., which is advising MBIA’s National Public Finance Guarantee Corp., to begin crafting a plan that would reduce Puerto Rico’s $70 billion in obligations. The commonwealth last week gave its creditors a revised restructuring proposal, which the people say includes losses that are larger than they’re willing to accept. The advisers and lawyers for traditional municipal-bond investors, hedge funds and insurers met as U.S. lawmakers move closer to legislation. The House Natural Resources Committee yesterday made public a discussion draft of a bill that would establish a control board to oversee Puerto Rico’s debt restructuring and annual budgets. It’s the most comprehensive legislation yet advanced by congressional Republicans to help address the island’s finances. Read more. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.

by Bill Rochelle, ABI Editor at Large

By permanently enjoining Puerto Rico’s minimum alternative corporate income tax, a federal district judge underscored the urgency for the Supreme Court or Congress to give the island access to chapter 9 municipal bankruptcy. The tax, referred to as the AMT, was aimed at Wal-Mart Puerto Rico Inc., the largest private employer and largest retail taxpayer in Puerto Rico. District Judge Jose Antonio Fuste in Puerto Rico held in his March 28 opinion that Wal-Mart has no prayer of ever obtaining a refund of the AMT because the commonwealth “is insolvent and no longer able to pay its debts as they come due.” Puerto Rico’s legislature enacted the AMT in May 2015 in 12 days. In his 109-page opinion written after a four-day trial in early February, Judge Fuste concluded that the AMT “is a legislative money grab pure and simple.” Read more. 

In related news, Puerto Rico Governor Alejandro Garcia Padilla welcomed proposed federal legislation that would help the island restructure its $70 billion of debt, while saying that it imposes too much U.S. control over the commonwealth, Bloomberg News reported today. A draft measure by House Republicans that has circulated on Capitol Hill would give a federal control board the legal authority to oversee a reduction of the island’s debts, instead of entrusting that power to local officials. The board would have the ability to cut the budget if Puerto Rico lawmakers are unable to erase the chronic deficits that are at the root of the fiscal crisis -- a step that would take key decisions away from the island’s legislature and governor. “The section on restructuring the debt is positive, but the price is too high,” Garcia Padilla told reporters Monday in San Juan. Read more. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

Congress will soon decide whether to shield cash-strapped Puerto Rico from investor lawsuits while the island maps a plan to resolve its financial crisis — an intervention that could divide some lawmakers and creditors, Reuters reported on Saturday. Republican leaders who control Congress are due within days to outline a Puerto Rico rescue plan that would restructure its $70 billion debt outside bankruptcy and confront a 45 percent poverty rate and a looming health crisis as the Zika virus spreads. Republican leaders agree with the Obama administration that an independent review board should mediate disputes between creditors and Puerto Rico officials, but lawmakers disagree over whether investors must put lawsuits on hold in the meantime. "I think we need to keep the pressure up," said Rep. Jeff Duncan (R-S.C.), who opposes a freeze, or stay, on litigation. "I would not be for allowing a stay," said Duncan, who has a vote on the Natural Resources Committee that is drafting a rescue plan. Republicans insist the Puerto Rico rescue is anything but a bankruptcy. Opening the door to a Puerto Rico bankruptcy would be "ill-conceived and would undermine the rule of law" Republicans argue in a written outline of the Puerto Rico rescue plan seen by Reuters on Friday. But while a stay on litigation "is a highly complex and sensitive component" of rescue, the hold on lawsuits is necessary, according to the outline, which envisions a five-member oversight board auditing Puerto Rico's finances and helping mediate creditor disputes. Read more. 

In related news, House Speaker Paul Ryan promised that House Republicans would have a plan to help Puerto Rico deal with its $70 billion debt by the end of March, yet some island officials are finding the emerging draft difficult to swallow, Bloomberg News reported yesterday. The bill being written would create a five-member board that will hire experts to oversee a process for Puerto Rico to restructure its debts, which threaten to cripple the commonwealth’s finances this spring. For Puerto Rico Governor Alejandro Garcia Padilla and other island officials, handing over financial control to a federally appointed panel will be difficult. Pedro Pierluisi, Puerto Rico’s Democratic delegate in Congress, is already raising concerns, saying he has several remaining conditions. “If they are not met, the bill will not become law,” Pierluisi said in a statement on Saturday. “And, if a bill does not become law, Puerto Rico and its creditors will almost certainly go over a cliff — together — this summer.” Still, he couched his conditions with an insistence he can work to make modifications with his Republican and Democratic colleagues “to create a final product that is a net positive for the people of Puerto Rico.” Read more. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

Politicians in Washington, D.C., are coalescing around a financial plan to rescue Puerto Rico, just weeks before an expected major default on bond payments that would spread more turmoil through the island’s shaky economy, the New York Times reported today. The plan, being drafted as legislation by House Republicans, would not grant Puerto Rico’s most fervent request: permission to restructure its entire $72 billion debt in bankruptcy. It would, however, give the island certain crucial tools that bankruptcy proceedings can offer — but only if it first comes under close federal oversight and meets other conditions. The oversight would be provided by a five-member voting board, selected by the president of the United States from candidates with expertise in finance, law or other relevant fields; at least two would have their primary residence in Puerto Rico. The secretary of the Treasury and the governor of Puerto Rico would also serve on the board, but would not have a vote. Read more. 

A related Bloomberg News report found that the emerging U.S. House Republican bill to address Puerto Rico’s debt crisis would create a strong oversight board and a mechanism to force creditors to accept a restructuring deal, according to a congressional official familiar with the legislative efforts and a written summary. The board’s debt restructuring powers could include all creditors, but only after certain conditions are met, a congressional official said. The partial draft also provides for the board to petition a judge for a court-supervised restructuring, which would amount to a cram-down mechanism to force resistant investors to accept a deal. The proposal would be an alternative to a process under chapter 9 of the U.S. bankruptcy code, which Republicans have opposed. As part of the plan, lawmakers are also considering safeguarding Puerto Rico from legal action by temporarily prohibiting creditor lawsuits. Read more. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

Watch as ABI Editor at Large Bill Rochelle and ABI Resident Scholar Prof. Melissa Jacoby discuss issues that arose in the Supreme Court oral argument that took place in Puerto Rico v. Franklin California Tax-Free Trust. Click here to watch the discussion.

Democrats' support for emergency Puerto Rico legislation hinges on providing bankruptcy protection to the U.S. territory, the second-ranking House Democrat warned yesterday, The Hill reported. "We don't think it can be done without bankruptcy authority because we don't believe they'll get an ability to work out, with their creditors, payment schedules," said Rep. Steny Hoyer (D-Md.), the minority whip. Puerto Rico's debt has ballooned to more than $72 billion, and Democrats in the White House and on Capitol Hill have warned of an imminent humanitarian disaster if Congress doesn't act to help the territory manage the crisis. Speaker Paul Ryan (R-Wis.) said yesterday that a group of bipartisan House lawmakers will meet to discuss a strategy. The House Natural Resources Committee, he added, will take up a bill on April 13, a day after the House returns from its 19-day spring recess. But that bill has yet to be written, and there's wide disagreement over what it should look like. Democrats want to empower Puerto Rico to dump some of its debt unilaterally while restructuring its finances to prioritize state pensions above bond liabilities owed to private investors. But the investors with stakes in Puerto Rico's enormous debt are adamantly opposed to empowering the territory with sweeping new bankruptcy protections that were not in place when the investments were made and would likely batter their bottom lines. Read more. 

In related news, the Supreme Court heard oral argument today to grapple with a First Circuit opinion striking down Puerto Rico’s own municipal bankruptcy law, according to an analysis by ABI’s Bill Rochelle. The high court’s decision, expected by the end of June, might give Puerto Rico the ability to adopt laws of its own to adjust the debts of its municipalities so long as they do not violate the Contracts Clause of the federal Constitution. Depending on how the high court writes the opinion, states not opting into the federal municipal bankruptcy system might also be able to adopt their own regimes to deal with their insolvent instrumentalities. The high court’s decision could turn in two directions. The justices might tackle the case as a straightforward, although complex, question of statutory interpretation. Or, the Court could plunge into the depths of constitutional law by making a pronouncement on federalism. Click here to read the full analysis. 

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage. 

The Supreme Court will hear oral arguments today on whether chapter 9 of the federal bankruptcy code, which does not apply to Puerto Rico, nevertheless preempts or makes illegal a law adopted by the commonwealth that would allow its utilities to restructure their debts, BondBuyer.com reported. Seven of the high court's members will hear arguments for one hour. The group will not include Justice Samuel Alito, who is recusing himself over a potential conflict, or a ninth member because the late Justice Antonin Scalia's seat remains vacant. The two consolidated cases — Puerto Rico v. Franklin California Tax-Free Trust and Melba Acosta-Febo v. Franklin Tax-Free Trust — pit Puerto Rico, its Gov. Alejandro Garcia-Padilla and other commonwealth officials against hedge fund BlueMountain Capital Management and two sets of mutual funds advised by OppenheimerFunds and Franklin Advisors. All of the funds together hold roughly $2 billion of the Puerto Rico Electric Power Authority's bonds. The commonwealth wants the high court to overturn a ruling last July by a three-judge panel on the U.S. Court of Appeals for the First Circuit in Boston. That ruling concluded the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (DERA) adopted by the commonwealth in June 2014 was illegal. Read more. 

To read petitions and amicus briefs in preparation for today’s Supreme Court oral argument, please click here. 

President Barack Obama dangles U.S. dollars before the Castros while Congress stonewalls Puerto Rico’s pleas for debt restructuring. The Tampa Bay Rays take the field in Havana as San Juan fends off New York hedge funds wielding legal baseball bats. The Rolling Stones play a free concert for Cubans. Puerto Rico can’t get no satisfaction, according to an OpEd in yesterday’s Bloomberg View. Even as the resumption of diplomatic ties with the U.S. opens new possibilities for Cuba, Puerto Rico’s current status as a U.S. commonwealth has turned into an ugly dead end. Puerto Rico is defaulting in slow motion on $70 billion worth of debt. Its economy has shrunk 9 of the past 10 years. A few hundred miles to the west, meanwhile, economic reforms are creating new livelihoods for self-employed Cubans, whose material conditions are improving. Buoyed by the arrival of new tourists, remittances, and foreign investments, Cuba’s economy grew by 4 percent last year. Read the full OpEd.

For more news and analysis of Puerto Rico's debt crisis, be sure to visit ABI's "Puerto Rico in Distress" webpage.