WASHINGTON – A bill by Senate Democrats to provide a federal bailout for Puerto Rico’s unsecured debt isn't going anywhere because it's not likely to gain any Republican support.

The bill (S. 3262) introduced Wednesday by Sen. Elizabeth Warren, D-Mass., so far has attracted only liberal Democrats as cosponsors.

But Eduardo Bhatia, minority leader of the Puerto Rico Senate, said he welcomes the proposal for $7.5 billion in debt relief.

The U.S. Territorial Relief Act of 2018 would give territories the option to terminate their unsecured, public debt obligations if they meet two out of three conditions.

The territory must have suffered a population loss of at least 5%over 10 years, received major federal disaster assistance, or be burdened by a debt load of more than $15,000 per capita. Puerto Rico meets these conditions.

Eduardo Bhatia, minority leader of the Puerto Rico Senate
Eduardo Bhatia, minority leader of the Puerto Rico Senate Brian Tumulty, The Bond Buyer

The conditions also might allow the U.S. Virgin Islands to qualify for debt relief, but the $7.5 billion fund to compensate unsecured creditors would be specific to Puerto Rico with the payments to be determined by a special master.

The special master would make payments only to unsecured creditors who are individual investors, trade unions, pension plans, and open-end mutual funds. But hedge funds and their investors, bond insurers, many financial firms with consolidated assets greater than $2 billion, and repo or swaps investors would not be eligible.

Congress has the Constitutional authority to impose these limitations along as it doesn't involve secured debt, according to a letter by seven law professors specializing in bankruptcy and financial regulation that was released by Warren’s office.

“Secured creditors would be protected under a judicial process that would allow them to contest the extent and perfection of their security interests,” said the press release on the bill.

Under the bill, a territory would become eligible for debt relief upon the request of both its governor and legislature.

Bhatia, who had not yet seen the bill when he spoke to The Bond Buyer, said he welcomes “any help we can get right now to get rid of the debt” given that the commonwealth “is finding it is getting more and more uphill to honor all the commitments” that PROMESA has placed on it.

“At least it starts a conversation – which we have not had – on how to pay the bill,” Bhatia said.

Municipal bankruptcy expert James Spiotto said he considers the $7.5 billion proposal a starting point.

“Everything is a negotiation so who knows what the right number is,” said Spiotto, managing director of Chapman Strategic Advisors LLC. “Obviously there is a number somewhere that will bring people together. It may not be a number that one side or either side desires, but it might be the number that gets the deal done.”

Spiotto joined Bhatia Wednesday in testifying to the House Natural Resources Committee on the future of the Puerto Rico Electric Power Authority.

The commonwealth’s financial troubles involve not just the territorial government but also its utilities and municipalities.

The proposed bill would cover all of the qualifying territory’s instrumentalities, including political subdivisions, public agencies, public corporations, and banking corporations.

Democratic cosponsors of Warren’s bill, include Sens. Bernie Sanders, I-Vt., Kirsten Gillibrand, D-N.Y., Edward Markey, D-Mass., and Kamala Harris, D-Calif.

Rep. Nydia Velázquez, D-N.Y., plans to sponsor the House version of the bill.

Sanders was joined last November by Warren and other Democrats in introducing a $146 billion so-called Marshall Plan for rebuilding Puerto Rico and the U.S. Virgin Islands.

That bill, the Puerto Rico and Virgin Islands Equitable Rebuild Act (S. 2165), also doesn’t have any Republican cosponsors.

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