As Puerto Rico’s debt crisis came into clearer view this week, so too did a noisy faction of voices both supporting and opposing the Puerto Rican government’s push to allow the island to restructure its debt in bankruptcy.
The two sides of the debate have enlisted high-powered lobbying and public affairs firms to make their case as the long-simmering issue of Puerto Rico’s deteriorating financial condition is now coming to a boil.
Puerto Rico’s government is pushing Congress to allow it to seek Chapter 9 municipal bankruptcy, which is currently not permitted under the law because the island is a commonwealth, not a city or municipality. This would allow Puerto Rico to protect itself from creditors while it develops a plan to restructure debts.
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A bill introduced in February by Puerto Rico’s non-voting representative in the House would amend the law to allow the island to take advantage of these bankruptcy rules. The measure has not advanced since March, when it was referred to the House Judiciary subcommittee, and it does not have any co-sponsors.
But the issue now has greater urgency with Puerto Rico on the path to possible default.
The bankruptcy option is riling up some investment funds that hold a significant portion of bonds issued by Puerto Rico Electric Power Authority (PREPA), the cash-strapped government-owned utility. Bondholders bought the bonds with the understanding that Puerto Rico would not be able declare bankruptcy, and allowing the island to do so now would violate the terms of that agreement and impose a risk on bondholders that they did not anticipate. Some conservative groups are also fighting the legislation, arguing the bankruptcy option amounts to a government bailout.
To help sell its message in Washington, the Puerto Rican government has hired SKD Knickerbocker, the public affairs agency led by former Obama White House communications director Anita Dunn, and Podesta Group, the powerhouse lobbying firm founded by Democratic lobbyist and mega-donor Tony Podesta. A spokeswoman for Podesta Group declined to comment. Lobbying records show the Puerto Rican government has paid the firm $1.15 million since 2013.
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The island’s allies in the fight include the Puerto Rico Statehood Council, a D.C.-based advocacy group that hired lobbyists at Navigators Global in March to advocate for the bill, paying the firm $10,000 during the first quarter of 2015.
“Bankruptcy has been around since the Constitution, we think it’s a sensible, conservative way to handle its debt, a la Detroit,” said lobbyist Phil Anderson of Navigators Global.
Anderson, a former aide to Vice President Dan Quayle, created the Puerto Rico Fiscal Stability Coalition to push for the bill. The coalition is led by former Puerto Rico Governor Luis Fortuño and Senate President Eduardo Bhatia and includes 32 financial institutions that collectively hold $4.2 billion in Puerto Rico municipal debt. It has a Web site and corresponding Twitter account, which had 113 followers as of Thursday.
The Latino Coalition Urges House Judiciary Committee to Approve H.R. 870 – The Puerto Rico Chapter 9 Uniformity Act http://t.co/Vhx1hcJjvK
— Puerto Rico FSC (@PuertoRicoFSC) April 23, 2015
Six investment management firms that hold PREPA bonds — BlueMountain Capital Management, Franklin Advisers, Knighthead Capital Management, Marathon Asset Management, Angelo Gordon & Co. and D.E. Shaw Galvanic Portfolios — have hired lobbyists at Venable to oppose the bill. BlueMountain has also retained lobbyists at Gibson Dunn, and paid the firm $50,000 so far this year.
BlueMountain holds more than $400 million in bonds issued by PREPA, according to Bloomberg.
BlueMountain and Franklin have also taken the battle to the courts, last year filing lawsuits in Puerto Rico seeking to block a law that allowed some public corporations to restructure their debt. A judge in February struck down the law, saying it is unconstitutional, The New York Times reported.
Some of the immediate tension concerning PREPA was alleviated earlier this week when the utility reached a last-minute deal with creditors to make a $416 million bond payment that came due Wednesday, thus avoiding default. But it is a small part of the utility’s $9 billion debt and the island’s $72 billion overall debt. As part of the deal, the government will continue negotiating with creditors about restructuring debt until September.
Also opposing the bankruptcy option is the 60 Plus Association, a seniors advocacy group that casts itself a conservative alternative to the AARP. The group’s national spokesman is the 1950s pop singer Pat Boone, and it was part of a coalition of conservative groups that collectively raised at least $407 million in the 2012 elections, backed by a donor network organized by Charles and David Koch, according to a 2014 Washington Post and Center for Responsive Politics analysis.
A spokesman for the group said the bankruptcy option would be a government handout and proposed an alternative solution: form an outside control board that would manage Puerto Rico’s debts so the island can meet its debt obligations.
The group in late June launched a paid media campaign, “No Bailout for Puerto Rico,” including full-page ads in Politico and the Wall Street Journal, and created a corresponding Twitter account (@NoBailout4PR, with 122 followers). A 60 Plus spokesman declined to say how much the organization is spending on the ads.
— NoBailout4PR (@NoBailout4PR) July 1, 2015
“The ideal outcome is for Puerto Rico to honor the debt they issued, so investors who put trust in their Puerto Rico-backed investments are not left to pay the price for its leaders’ mismanagement,” said 60-Plus Association spokesman Gerry Scimeca. “The best realistic outcome at this point, however, is for Congress to enact and manage a control board to manage Puerto Rico’s debt crisis, resolve the mismanagement issues which have placed them in this predicament, and provide the most fair and equitable outcome to investors and pensioners.”