On June 30, 2016, President Obama gave his imprimatur to the Puerto Rico Oversight, Management, and Economic Stability Act, Pub. L. No. 114-187 (2016) (“PROMESA”) (H.R. 5278 and S. 2328). The bipartisan legislation was approved by both Houses of Congress in a flurry of legislative dealmaking that preceded a July 1, 2016, deadline for Puerto Rico to make $2 billion in bond payments. Despite the passage of PROMESA, Puerto Rico defaulted on its constitutionally guaranteed debt for the first time on July 1.

The enactment of PROMESA followed a June 13, 2016, ruling by the U.S. Supreme Court that upheld lower court rulings declaring unconstitutional a 2014 law, portions of which mirrored chapter 9 of the Bankruptcy Code, which law would have allowed the commonwealth’s public instrumentalities to restructure a significant portion of Puerto Rico’s bond debt (widely reported to be as much as $72 billion). See Commonwealth v. Franklin Cal. Tax-Free Tr., 2016 BL 187308 (U.S. June 13, 2016) (discussed elsewhere in this edition of the Business Restructuring Review).

Among other things, PROMESA provides for the establishment of an Oversight Board entrusted with determining the adequacy of budgets and fiscal plans for the instrumentalities of Puerto Rico and other covered territories. It also provides a mechanism for the implementation of voluntary out-of-court restructuring agreements between an instrumentality and its bondholders as well as bond debt adjustment plans (consensual and nonconsensual) in a case commenced in federal district court.

Set forth below is a brief summary of PROMESA’s most important provisions.

Effective Date June 30, 2016
Covered Territories Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, and the United States Virgin Islands.
Oversight Board An oversight board consisting of seven members appointed by the president for a three-year term (subject to renewal).
Powers of the Oversight Board The Oversight Board has the power to, among other things:
  • Require the governor of a covered territory, including Puerto Rico (“PR,” for ease of reference), to submit budgets and monthly reports regarding the commonwealth’s instrumentalities;
  • Approve fiscal plans that provide a method to achieve fiscal responsibility and access to capital markets;
  • Ensure that the assets of an instrumentality are not loaned to, transferred to, or otherwise used for the benefit of PR or its instrumentalities unless permitted by the Constitution or agreed to in a certified voluntary restructuring agreement or an approved adjustment plan;
  • Approve annual budgets, failing which the board shall have the power to make appropriate reductions in nondebt expenditures to ensure that actual quarterly revenues and expenditures are in compliance, institute automatic hiring freezes, and prohibit PR from entering into any contract or engaging in any financial or other transactions without board approval;
  • Disclose information regarding the identity of creditors and their claims;
  • Certify a voluntary restructuring agreement between an instrumentality and bondholders holding a majority in principal amount of its bonds, provided the Oversight Committee determines that the agreement provides for a sustainable level of debt for the instrumentality and is in conformance with a certified fiscal plan;
  • Commence a voluntary case under PROMESA on behalf of an eligible instrumentality by filing a petition with the district court;
  • Certify voluntary restructuring agreements between PR and its bondholders;
  • Certify a plan of adjustment between PR and creditors as being consistent with the applicable certified fiscal plan;
  • Exercise the exclusive right to propose or modify debt adjustment plans;
  • Ensure the prompt and efficient payment and administration of taxes through adoption of electronic reporting, payment, and auditing technologies;
  • Approve or deny any proposal by PR or an instrumentality to issue debt or guarantee, exchange, modify, repurchase, redeem, or enter into similar transactions with respect to its debt;
  • Analyze materially underfunded pension liabilities of PR or its instrumentalities; and
  • Approve (with the votes of at least five members) an instrumentality as an eligible debtor for purposes of a debt adjustment plan.
Termination of the Board The Oversight Board shall terminate upon certification that PR has adequate access to short- and long-term markets at reasonable rates, that PR has developed an approved budget for at least four years, and that expenditures did not exceed revenues during that period.
No U.S. Government Guarantee The full faith and credit of the U.S. is not pledged for the payment of any bond, note, or other obligation issued by PR or its instrumentalities after the enactment of PROMESA.
Preemption PROMESA preempts any PR law purporting to implement a binding composition of indebtedness or moratorium without the consent of creditors.
Jurisdiction The federal district courts shall have exclusive jurisdiction over all cases brought under PROMESA.
Bankruptcy Code Provisions Applicable in PROMESA Cases Sections 101 (with certain exceptions), 102, 104, 105, 106, 107, 108, 112, 333, 344, 347(b), 349, 350(b), 351, 361, 362, 364(c), 364(d), 364(e), 364(f), 365, 366, 501, 502, 503, 504, 506, 507(a)(2), 509, 510, 524(a)(1), 524(a)(2), 544, 545, 546, 547, 548, 549(a), 549(c), 549(d), 550, 551, 552, 553, 555, 556, 557, 559, 560, 561, 562, 902 (with certain exceptions), 922, 923, 924, 925, 926, 927, 928, 942, 944, 945, 946, 1102, 1103, 1109, 1111(b), 1122, 1123(a)(1), 1123(a)(2), 1123(a)(3), 1123(a)(4), 1123(a)(5), 1123(b), 1123(d), 1124, 1125, 1126(a), 1126(b), 1126(c), 1126(e), 1126(f), 1126(g), 1127(d), 1128, 1129(a)(2), 1129(a)(3), 1129(a)(6), 1129(a)(8), 1129(a)(10), 1129(b)(1), 1129(b)(2)(A), 1129(b)(2)(B), 1142(b), 1143, 1144, 1145, and 1146(a) apply in a PROMESA case, and section 930 shall also apply (governing dismissal of a case), except during the first 120 days after the petition date.
Confirmation of Plan of Adjustment To be confirmable, a plan of adjustment must:
  • Be feasible and in the best interests of creditors, upon consideration of whether available remedies under nonbankruptcy law and the PR Constitution would result in greater recovery for creditors than the recoveries provided under the plan;
  • Be consistent with the approved fiscal plan; and
  • Satisfy the requirements of section 1129(a) of the Bankruptcy Code, unless only a single class of impaired claims has not accepted the plan, which must be fair and equitable and must not discriminate unfairly with respect to the impaired class.
Automatic Stay PROMESA provides that, effective upon enactment, and subject to a police and regulatory powers exception for governmental units, there shall be an automatic stay of all creditor collection efforts against PR and its instrumentalities until the later of February 15, 2017, or six months after the establishment of the Oversight Board. Certain extensions of the duration of the stay are permitted. Relief from the stay may be granted by the court for “cause.” The stay terminates automatically 45 days after a request for stay relief is made unless the court orders otherwise. Parties providing goods and services to PR or its instrumentalities must continue to perform under their contracts during the pendency of the stay, provided that PR or the instrumentality is not in default other than as a consequence of its insolvency or financial condition. If the Oversight Board determines it is feasible, PR shall continue to make interest payments on debt during the pendency of the stay.
Liability of Transferees Transferees of PR or instrumentality property in violation of any applicable law for the benefit of creditors or security agreement shall be liable for the value of the property transferred.
Solicitation of Plan Solicitation of votes on a proposed plan of adjustment must be accompanied by any approved fiscal plan and any other information required under applicable securities laws.
Voting on Plan and Binding Effect A plan of adjustment is accepted by bondholders if the holders of at least two-thirds of the principal amount of bonds in each “pool” of bonds (secured, unsecured, guaranteed, and nonguaranteed bonds generally being separately classified) vote to accept the plan. Modification of the rights of bondholders under a plan of adjustment shall be binding on all holders of a series of bonds, whether or not they consent, if: (i) eligible voting bondholders in each pool vote to accept the plan by the requisite majority; and (ii) the Oversight Board certifies that (a) the voting requirements have been satisfied, (b) the proposed modification provides for, among other things, a sustainable level of debt, and (c) any dissenting secured bondholder will retain the liens securing its bonds or will receive on account of its bond claim, through deferred cash payments, substitute collateral or otherwise value equivalent to the lesser of the face amount of its claim or the value of its collateral.