Com­pe­ti­tion among Puerto Rico’s debthold­ers is stalling res­cue plans in Congress

Debthold­ers are lob­by­ing to make sure they get paid first “There are dis­agree­ments among House mem­bers”

Bloomberg Businessweek (Europe) - - NEWS - The bot­tom line Com­pet­ing claims on Puerto Rico’s $70 bil­lion debt is slow­ing con­gres­sional ef­forts to avert fis­cal col­lapse. Edited by Al­li­son Hoff­man

For months, Repub­li­cans in Congress have stalled pro­pos­als to pre­vent a fi­nan­cial col­lapse in Puerto Rico, which is stag­ger­ing un­der $70 bil­lion in debt. The lat­est de­lay? Con­flict­ing de­mands from com­pet­ing groups of bond­hold­ers, who are lin­ing up on op­po­site sides of a bill that would let the is­land ter­ri­tory write off some of its bur­den. Hedge funds and other in­vestors who own about $5 bil­lion of Puerto Rico’s gen­eral obli­ga­tion bonds, which are guar­an­teed un­der the is­land’s con­sti­tu­tion, are push­ing for re­vi­sions to the pro­posed mea­sure. Firms that own $1.6 bil­lion in se­cu­ri­ties backed by sales taxes fa­vor the leg­is­la­tion, which in­cludes pro­vi­sions for an in­de­pen­dent over­sight panel that would help

keep Puerto Rico’s econ­omy afloat.

The House Com­mit­tee on Nat­u­ral Re­sources, which has been tasked by House Speaker Paul Ryan with work­ing out a com­pro­mise, abruptly can­celed an April 14 vote on the draft leg­is­la­tion so it could be re­vised. The House Free­dom Cau­cus, a group of about three dozen con­ser­va­tive leg­is­la­tors, hud­dled on April 18 to dis­cuss their stance. Ac­cord­ing to a par­tic­i­pant who spoke on the con­di­tion he not be iden­ti­fied, the group wants as­sur­ances that the bill will treat dif­fer­ent classes of cred­i­tors fairly. “The con­flict­ing mes­sages that law­mak­ers are get­ting from in­vestors is mak­ing them less likely to want to be seen pick­ing one cred­i­tor group over an­other,” says Daniel Han­son, an an­a­lyst at Height Se­cu­ri­ties, a Wash­ing­ton-based bro­ker-dealer. “There are dis­agree­ments among House mem­bers over which cred­its are strong­est and what’s the right way to pro­ceed.”

The leg­is­la­tion ini­tially re­leased by the com­mit­tee would al­low a fed­eral board to weigh in on Puerto Rico’s bud­gets, over­see debt re­struc­tur­ing, and put bond­holder law­suits tem­po­rar­ily on hold. Puerto Rico is fac­ing bond pay­ments it may not be able to make in May and July. Gov­er­nor Ale­jan­dro Gar­cía Padilla has pushed Congress to grant him the right to re­struc­ture the is­land’s debt in court. In its most re­cent pro­posal, Puerto Rico said it would pay 74¢ on the dol­lar for gen­eral obli­ga­tion and govern­ment-guar­an­teed debt and 57¢ for sales tax se­cu­ri­ties.

Gen­eral obli­ga­tion bond­hold­ers have hired Con­nie Mack, the for­mer

Repub­li­can rep­re­sen­ta­tive from Florida, to lobby on their be­half. The House bankruptcy leg­is­la­tion “would vi­o­late the pri­or­ity given to gen­eral obli­ga­tion bonds un­der Puerto Rico’s con­sti­tu­tion,” An­drew Rosen­berg, a lawyer at Paul, Weiss, Rifkind, Whar­ton & Gar­ri­son, which is rep­re­sent­ing the gen­eral obli­ga­tion bond­holder group, said in a state­ment.

That group is squar­ing off against in­vestors in sales tax-backed se­cu­ri­ties. Judd Gregg, a for­mer Repub­li­can U.S. senator from New Hamp­shire, is ad­vis­ing the se­cu­ri­ties’ hold­ers, who are con­cerned that Puerto Rico may re­di­rect sales tax rev­enue to help pay other ex­penses and would pre­fer to see an in­de­pen­dent over­sight board in charge. “We feel that the chances of our prop­erty rights be­ing prop­erly re­spected are greater in the hands of dis­in­ter­ested, dis­pas­sion­ate con­trol board mem­bers,” says Susheel Kir­palani, a part­ner at Quinn Emanuel Urquhart & Sul­li­van, which is rep­re­sent­ing hold­ers of sales tax debt.

Rep­re­sen­ta­tive Rob Bishop, a Utah Repub­li­can who chairs the Nat­u­ral Re­sources Com­mit­tee, says fi­nal leg­is­la­tion might not make it to the floor un­til May, but he’s con­fi­dent Ryan will be able to rally Repub­li­cans around a so­lu­tion: “I think we’re go­ing to get a ma­jor­ity.” Michelle Kaske and Billy House, with James Row­ley

it will be a sad day for the peo­ple who op­er­ate th­ese sites,” says Bryce Blum, gen­eral coun­sel for Unikrn, an e-sports gam­bling com­pany in Seat­tle that’s li­censed to op­er­ate some­what like a tra­di­tional sports bet­ting busi­ness and bars U.S. bet­tors.

In a hand­ful of court cases in­volv­ing vir­tual goods in video games, judges have ruled that bets with those items shouldn’t be con­sid­ered gam­bling. “Even in the In­ter­net world, there is a cru­cial dis­tinc­tion be­tween that which is pre­tend and that which is real and true,” U.S. District Court Judge James Bredar wrote in Oc­to­ber, dis­miss­ing a suit against mo­bile gam­ing com­pany Ma­chine Zone. “The laws of Cal­i­for­nia and Mary­land do not tri­fle with play money.” But un­like the gam­ing com­pa­nies that have suc­cess­fully de­fended them­selves in court, Valve’s soft­ware en­ables an ex­plicit con­nec­tion be­tween in-game goods and off­line cash.

Ryan Mor­ri­son is a lawyer in New York who spe­cial­izes in is­sues re­lated to video games. Over the past four months, he says, he’s re­ceived more than two dozen in­quiries from peo­ple who want to sue Valve af­ter los­ing money gam­bling on skins. Many are un­der­age, and the big­gest losses ex­tend into the thou­sands of dol­lars. None would agree to speak to a re­porter. “Valve acts as if they’re a 10-per­son in­die com­pany,” he says. “I am shocked that they let this go on.” Joshua Brustein and Eben Novy-Wil­liams

Jeb Bush didn’t get far in the GOP race, but his ad mak­ers scored a Pol­lie Award on April 14 for best 2015 tele­vi­sion ad for a Repub­li­can pri­mary can­di­date. FP1 Strate­gies’ win­ning spot, Honor, fea­tured mil­i­tary vet­er­ans en­dors­ing Bush.

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