The Heritage Foundation decries a proposal by Rep. Rob Bishop aimed at helping Puerto Rico cope with its enormous debt, saying it would turn bankruptcy law on its head.
Reports InsideSources:
With Puerto Rico edging toward financial ruin, House Speaker Paul Ryan forcefully entered the debate over the island’s fate last week with a plan that his allies say would allow the island to cope with its enormous debt. But that plan is provoking a backlash among conservatives, many of whom worry that it upends longstanding principles that they contend are essential to the stability of the market.
The plan by Mr. Ryan and Representative Rob Bishop, the chairman of the Natural Resources Committee, would provide Puerto Rico, a territory barred from Chapter 9 protection under the U.S. bankruptcy code, with some of the important tools that are available in normal bankruptcy proceedings.
It would, for example, allow the island to restructure the very same kind of debt that American cities and states are permitted to restructure, including municipal bonds and public corporation bonds. It also permits the restructuring of a form of debt that is peculiar to the island, so-called COFINA bonds that are backed by a local sales tax and issued by the Puerto Rico Sales Tax Financing Corporation.
While many conservatives have strong objections to retroactively tossing out debt agreements without creditor consent, this particular element of the plan does not appear to be the main force driving the concerns among conservatives, some of whom see the urgency of Puerto Rico’s situation and agree that the island requires some form of restructuring mechanism.
The controversy, rather, centers around a provision that makes bankruptcy restructuring applicable to a class of debt considered sacrosanct among financial experts and free-market conservatives. Known as super bankruptcy, the provision would grant Puerto Rico the ability to restructure general obligation bonds — also known as full-faith-and-credit bonds — essentially turning bankruptcy law on its head.
And in a classic demonstration of the influence game in Congress, the provision was reportedly slipped into the overall plan by senior Ryan and Bishop staffers after a furious lobbying effort by powerful hedge funds that are heavily invested in COFINA bonds and aggressively seeking to secure the best deal in any settlement or restructuring deal with the island.
