U.S. Republicans see bankruptcy rules framing Puerto Rico rescue

A draft of a bill to steer Puerto Rico through its economic crisis would incorporate key elements of U.S. bankruptcy law, a blow to creditors who have long lobbied to keep the island's debt talks out of court.

A so-called 'discussion draft' of the bill, circulated by the House Committee on Natural Resources, would include sections of the U.S. Bankruptcy Code that allow bankrupt entities under certain circumstances to force debt cuts on creditors who have not agreed to them.

Puerto Rico faces $70 billion in debt, including major bond payments due in coming months. It is also burdened by a near $44 billion unfunded state pension liability.

The bill "provides Puerto Rico with tools to impose discipline over its finances, meet its obligations and restore confidence in its institutions," Utah Republican Rob Bishop, the committee's chairman, said.

The Republican-led Natural Resources Committee's bill would create a federal board to oversee the island's finances, monitor its accounting and help curb spending. It would also require Puerto Rico to seek to achieve any debt restructuring consensually with creditors.



If those talks failed, the island or its public entities could file for a court-supervised debt restructuring process that would incorporate key statutes within U.S. bankruptcy law, including the ability to enforce restructuring deals on holdout creditors, if most other creditors agreed.

Creditors, as well as House Republicans, had largely opposed bankruptcy for Puerto Rico, making the bill unexpected. The Natural Resources Committee itself said "retroactively adding territories" like Puerto Rico to the federal bankruptcy code "is ill-conceived and would undermine the rule of law."



A congressional aide helping draft the legislation said the bill does not directly add Puerto Rico to U.S. bankruptcy law, though it is guided by some bankruptcy language.

House Minority Leader Nancy Pelosi criticized the "sweeping powers of the oversight board proposed" in the bill.

The bill may include language that protects an existing consensual restructuring deal between creditors and the power utility, PREPA, the congressional aide said. PREPA earlier this year reached the deal with creditors holding roughly 70 percent of its $8.3 billion in debt.



How the oversight board treats the island's General Obligation debt, which is typically treated as the most senior debt, versus pension payments is also a source of concern for creditors.

The oversight board will look at each bond issued and make a determination on how it relates to other creditors under the existing law, the aide said. If the GO bonds are constitutionally protected and within their limits then the board would take that into consideration.

An official draft of the bill is expected to be released on April 11.

(Reporting By Patrick Rucker in Washington and Nick Brown in San Juan; Editing by Daniel Bases and Alistair Bell)

U.S. Republicans see bankruptcy rules framing Puerto Rico rescue

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