By Richard Cowan and Susan Cornwell
WASHINGTON (Reuters) - A high-ranking Republican senator on Tuesday dismissed as "not satisfactory" draft legislation aimed at addressing Puerto Rico's fiscal crisis before a looming debt default on May 1, deepening intraparty divisions on the complex rescue effort.
Orrin Hatch of Utah, who chairs the powerful Senate Finance Committee, told reporters that draft legislation introduced this month by the House Natural Resources Committee is "not satisfactory and it's not going to work. And we're not going to be able to pass it over here” in the Senate.
House of Representatives Speaker Paul Ryan and fellow Republican leaders already were struggling to advance a bill to help Puerto Rico, a U.S. territory, deal with its crippling $70 billion debt. Their efforts have been complicated by opposition from some conservative lawmakers, even as they have been negotiating with the Obama administration over details.
Some conservative House Republicans, who want to protect creditors’ rights, have balked at an element of the bill that could allow Puerto Rico to cut repayments to creditors without their consent, a so-called cram-down debt restructuring.
Hatch, too, wants to protect creditors, but said the bill must include cram-down authority to ensure that more senior bondholders, like those holding Puerto Rico’s constitutionally backed public debt, are better protected.
"Let’s face it, you've got to protect the preferred creditors. If you don't do that, I mean, you're violating the rule of law to begin with,” Hatch said, adding that he is working on a different approach to the legislation.
The internal division showcases the complexity of the task facing lawmakers - to keep Puerto Rico’s economy intact, while also protecting the competing interests of 18 classes of bondholders owed money by the island.
In a brief interview with Reuters on Tuesday, House Natural Resources Committee Chairman Rob Bishop expressed confidence that once rank-and-file House Republicans familiarize themselves with his bill, it will gain momentum. He added that "bondholders and other players" were beginning to contact lawmakers to talk up the legislation.
Time is of the essence. Puerto Rico’s Government Development Bank owes creditors $422 million on May 1, a payment the island’s governor, Alejandro Garcia Padilla, has said it cannot afford. A default at GDB, the primary liquidity source for most of Puerto Rico’s public agencies, would be the island’s most significant default to date.
The bill would also create a federal board to oversee Puerto Rico’s finances, but legislators are debating how much power it should have.
Hatch on Tuesday said an oversight board would need "the power to resolve the problems.”
“If you don’t give them the power to do that, it’s just another bailout,” he said. “We’ll be back here two years from now.”
Hector Negroni, a prominent municipal finance investor, objects to the draft bill, saying it changes the rules under which debt was sold to investors and puts creditors at the bottom of the pile while ignoring the priority of payments.
That pivot will have a more adverse affect on the municipal bond market than any potential default in Puerto Rico, Negroni said on Friday, in a panel discussion held by the Lincoln Institute of Land Policy in Washington.
"So we have a framework here which doesn't help Puerto Rico, harms the state and local marketplaces by risking an expectation and change in the rules and raising borrowing costs,” he said. “So if it is not for Puerto Rico, and it is not for state and local governments, I'm not sure who this bill is for.”
Representative Steny Hoyer, the second-ranking House Democrat, told reporters on Tuesday that the bill is falling victim to intra-party divisions among Republicans. Hoyer said Republicans should collaborate with Democrats to advance a bill by next week that would need the support of only 40-50 of the House's 246 Republicans.
That would be a dangerous political step for Speaker Ryan, however, because he would be turning his back on a majority of members of his own political party on a major piece of legislation during an election year.
For now, Republicans “seem to be at risk of not doing it at all,” Hoyer said, referring to a Puerto Rico debt relief bill.
(Reporting by Richard Cowan, Susan Cornwell, David Morgan and Daniel Bases in Washington; Writing by Nick Brown in San Juan; Editing by Matthew Lewis)