NEW YORK (Reuters) - Bondholders are split on a proposed bill to give Puerto Rico's ailing public agencies a way to restructure debt under U.S. bankruptcy law, with some saying it would give confidence to the market and others arguing it is a "Wild West" solution.
The bill to give Puerto Rico's agencies the ability to file under Chapter 9 of the U.S. bankruptcy code - used by Detroit, Michigan, and Stockton, California - was proposed by the U.S. territory's representative to Congress, Democrat Pedro Pierluisi. It will be heard on Thursday.
"(It) would provide confidence to the municipal markets," said Morrison & Foerster partner Anthony Princi, in a letter distributed by Pierluisi ahead of the hearing. Princi represents a group of 32 institutions holding more than $4.2 billion in Puerto Rico debt.
FCO Advisors, an investment firm with exposure to Puerto Rico, said the consensus from numerous mutual funds, hedge funds and financial institutions was "that the approach is valid and merits consideration."
However, Thomas Mayer, a partner at Kramer Levin, who represents funds managed by Franklin Municipal Bond Group and OppenheimerFunds Inc in respect to their investment in $1.6 billion of Puerto Rico's electric utility PREPA bonds, said use of Chapter 9 will cause more harm than good.
PREPA is in dire shape, laden with about $9 billion in debt and already deep in restructuring negotiations with bondholders. Using Chapter 9 would force bondholders to shoulder the burden of PREPA's operational failures and Puerto Rico's fiscal irresponsibility, Mayer said.
"Chapter 9 is the Wild West," Mayer's testimony said. "The only certainty is that Chapter 9 takes a long time - at least 18 months to three years - and is very expensive."
Pierluisi has argued that the bill would be in the best interests of all stakeholders, including creditors.
"So far as I can tell, the opposition to this bill comes from a very small subset of investment firms," said Pierluisi. "I hope that Congress will not allow such objections to frustrate forward movement on this widely-supported bill."
Discussion about the bill was reignited when a federal court on Feb. 6 struck down a local law enacted by the Caribbean island granting agencies similar debt-restructuring authority.
Puerto Rico's Government Development Bank said Chapter 9 would be a "useful tool for Puerto Rico's long-term economic success, whether or not it is actually invoked," according to testimony from GDB President Melba Acosta.
(Reporting by Megan Davies; Editing by Chris Reese)