Puerto Rico's debts due, Congress stalls

In this Dec. 8, 2015 file photo, House Majority Leader Kevin McCarthy of Calif. speaks with a reporter on Capitol Hill in Washington.
In this Dec. 8, 2015 file photo, House Majority Leader Kevin McCarthy of Calif. speaks with a reporter on Capitol Hill in Washington.

WASHINGTON -- Congress will not act to help debt-ridden Puerto Rico ahead of a Sunday deadline when nearly half-a-billion dollars in bond payments come due, House Majority Leader Kevin McCarthy said Tuesday.

The California Republican's statement to reporters amounted to the obvious, given that the deadline is days away and the House has failed so far even to get a bill out of committee. A more important deadline looms July 1 when around $2 billion in principle and interest payments come due.

McCarthy said he's "hopeful" a bipartisan bill could emerge from the House by then, though the Senate still would have to act.

Senate Majority Leader Mitch McConnell said Tuesday that the Senate would let the House go first on the issue.

"We know it needs to be dealt with and we're in discussions with them about what ought to be done," McConnell said.

Even as the island territory -- home to 3.5 million U.S. citizens -- faces financial catastrophe, Congress has been unable to come together around a solution. Some House conservatives have been scared off by an aggressive ad campaign, funded by shadowy interests, claiming congressional intervention would amount to a bailout.

McCarthy and House Speaker Paul Ryan have been adamant there will be no bailout. Instead the bill they back would set up a control board that could help the commonwealth restructure its ballooning debt, some of it resulting from decades of Washington tax policies that encouraged investment in Puerto Rico, then drove it away.

"We're going to protect taxpayers; it will not be a bailout," McCarthy said. "And if we don't proactively do that, we could be in a situation that puts taxpayers at risk."

McCarthy sought to shift some of the blame to President Barack Obama's administration, claiming lawmakers have been waiting for some answers from the Treasury Department.

"We'll get it done as soon as possible. The most important thing to do here is to get it done right," he said.

At the White House, spokesman Josh Earnest disagreed with McCarthy's criticism of the administration. He said the White House was "encouraged by the fact that the leader of the House has finally acknowledged that there is something that needs to be addressed here."

Nothing safe

As Puerto Rico tries to cut its $70 billion of debt, investors are learning nothing is off-limits, with even constitutionally guaranteed general obligations staring down losses.

While Gov. Alejandro Garcia Padilla has yet to halt any payments -- and creditors have yet to file the inevitable lawsuits -- the threat of default on even the most-secure bonds by claiming police powers shows how far the commonwealth is willing to go to restructure its debt burden.

Included in the commonwealth's debt moratorium law passed this month: Children's Trust, a nonprofit entity created to issue debt backed by legal-settlement money that U.S. states and localities receive from cigarette companies.

Its presence is puzzling in that, unlike almost every other Puerto Rican bond, some of the tobacco securities still carry investment-grade ratings because the cash that pays investors is deemed out of the government's reach.

"The tobacco financing speaks in the language of true sale and trust agreements and was created specifically to insulate bondholders from the general fund," said Matt Fabian, a partner at Concord, Mass.-based Municipal Market Analytics. "Legal hurdles aren't what Puerto Rico is focusing on right now."

The moratorium law is meant to give Puerto Rico the tools it needs to weather its crisis while providing citizens with essential services, said Barbara Morgan, a representative at SKDKnickerbocker in New York who represents the commonwealth's Government Development Bank.

"The inclusion of an entity, like the Children's Trust, in the act does not automatically mean these tools will be applied to that entity," she said in an email.

Tobacco securities are one of the few corners of the $3.7 trillion municipal market where default isn't just possible -- it's probable. They're mostly considered junk because when governments first sold them more than a decade ago to get instant cash from the 1998 settlement revenue, they didn't anticipate how quickly Americans would give up smoking.

Moody's Investors Service last projected that a 4 percent annual decline in the cigarette shipments that back the bonds would cause 80 percent of them to fail to pay on time. That wouldn't cause a default on Children's Trust debt issued in 2002, according to the forecast.

Information for this article was contributed by Erica Werner, Mary Clare Jalonick and Nancy Benac of The Associated Press and by Brian Chappatta of Bloomberg News.

A Section on 04/27/2016

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