Puerto Rico: Congress And Supreme Court Shape A Path Towards Financial Recovery

Puerto Rico's financial woes have recently been front and center in financial news. Although a recent decision by the U.S. Supreme Court curtailed Puerto Rico's ability to enact its own legislation to address its debt situation, late last month President Obama signed into law legislation designed to allow Puerto Rico to restructure its vast public debt, giving new hope to the Commonwealth's financially strapped public utilities. The particulars of how this legislation will be implemented will have significant implications for these public utilities, which bear a combined debt exceeding $20 billion. Stakeholders in Puerto Rico's financial fortunes are closely reviewing the developing legal landscape.

PROMESA: Congress Adopted Legislation to Aid Puerto Rico in Restructuring

A bill that was recently approved with bipartisan support in both the House of Representatives and the Senate could provide a way for Puerto Rico to restructure some of its heavy debt load by creating a process for what may be the largest municipal debt workout in U.S. history. The legislation creates a seven-member board to oversee the process and balance the island's finances. Members of the oversight board will be appointed by the president from lists of candidates submitted by congressional leaders.

The Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) does not provide for federal funds to be contributed to assist Puerto Rico to resolve its financial problems. Instead, PROMESA establishes procedures and requirements for the oversight board to initiate a procedure to restructure the island's debt, with the board operating as Puerto Rico's representative.

Certain aspects of PROMESA provide procedures similar to provisions of the Bankruptcy Code. Establishment of the oversight board operates as an automatic stay preventing creditors from enforcing claims against the Commonwealth's government. The board will also be empowered to divide creditors into different pools based on the characteristics of the debt, and each pool can vote on a plan to restructure debt. And also similar to a case under the Bankruptcy Code, if a certain percentage of the outstanding principal amount of a pool agrees with the restructuring plan, the pool can file a petition in court to bind the dissenting creditors to the plan.

PROMESA also empowers the oversight board to approve and enforce budgets, and approve a fiscal plan proposed by Puerto Rico's governor.

The U.S. Supreme...