U.S. and the Puerto Rican FlagWhen we last discussed the Commonwealth of Puerto Rico’s efforts to restructure some $72 billion in municipal debt, a Federal District Court Judge had found the Commonwealth’s 2014 municipal debt-restructuring law, the “Recovery Act,” to be pre-empted by the federal Bankruptcy Code, unconstitutional and therefore void. The ruling hinged on the definition of “State” under Section 101(52) of the Bankruptcy Code, which explicitly excludes Puerto Rico for the purpose of determining eligibility for Chapter 9 restructuring.  Puerto Rico had designed the Recovery Act specifically to provide a bankruptcy option for reducing public utility debts, which account for over a third of the U.S. territory’s total municipal debt burden.  With this option off the table, Puerto Rico and its creditors were forced to wait for the U.S. Congress to act by amending the Bankruptcy Code.

Much has happened since February. Notably, in mid-June, the U.S. Supreme Court affirmed the Federal District Court decision by a 5-2 margin, finding that Puerto Rico is indeed ineligible under the existing Bankruptcy Code and that pre-emption “bars Puerto Rico from enacting its own municipal bankruptcy scheme to restructure the debt of its insolvent public utilities.”

On June 30, 2016, just a few weeks after the Supreme Court ruling, President Obama signed into law the bipartisan “Puerto Rico Oversight, Management, and Economic Stability Act,” or “PROMESA,” which is a word meaning “promise” in Spanish. PROMESA is drafted to provide Puerto Rico with a breathing spell to help it restructure its debts, rather than simply discharge them.  The law imposed an immediate stay of all litigation and collection actions directed against Puerto Rico that will remain in effect until at least February 15, 2017 and can be extended for up to 135 more days.

Shortly after the enactment of PROMESA, Puerto Rico missed a $1 billion principal and interest payment due in early July and a smaller $10 million interest payment in September. These missed payments triggered defaults on general obligation bonds, which are backed by the “full faith and credit” of the Commonwealth.  Puerto Rico’s next major principal and interest payment date occurs in January 2017.

PROMESA required President Obama to appoint members to a seven-member board, which he did on August 31, to oversee the debt restructuring efforts. The law entrusts the board with broad powers to make nearly every fiscal decision for the government of Puerto Rico and to negotiate with creditors.  The board began meeting in late September and set an October 14 deadline for Puerto Rico’s governor to deliver a plan for fiscal sustainability, along with requirements to deliver weekly cash flow reports and monthly revenue and tax collection reports.  However, the board has the authority to reject the governor’s fiscal plans and impose its own at its discretion.

The oversight board also has indicated that it expects to set deadlines for the submission of fiscal plans from Puerto Rico’s sewer authority and electric utility. Complicating matters somewhat is the fact that Puerto Rico’s political leadership will soon turn over, as the island’s unpopular governor is not running for reelection in November.  So, responsibility for executing the fiscal sustainability plan that is expected to be presented later this week will fall to a regime that did not design it.  Time is of essence, however, as funding shortfalls at Puerto Rico’s utilities have caused serious performance issues, including recent island-wide blackouts.  The utilities desperately need restructuring negotiations to reopen their access to credit markets.

Because fiscal plans are due to be presented to the oversight board soon, significant debt payments are on the horizon and November’s elections will result in a change in leadership in Puerto Rico, this will continue to be a situation to monitor closely over the coming weeks and months.