Restructuring

On June 30, 2016, Congress passed and President Obama signed into law a new piece of federal legislation that will govern the restructuring of U.S. territories: Public Law No: 114-187.  Although not limited to the Commonwealth of Puerto Rico, enactment of the new law, entitled the Puerto Rico Oversight, Management, and Economic Stability Act or “PROMESA,” represents a bipartisan achievement in the context of a worsening fiscal crisis in Puerto Rico.  The enactment of PROMESA also comes two weeks after the Supreme Court affirmed the judgment of the First Circuit that the Bankruptcy Code pre-empted the Debt Enforcement and Recovery Act, a restructuring law that had been enacted by the government of Puerto Rico in 2014. 
While PROMESA may be broadly conceived as a restructuring law, it does more than establish a judicial process for the restructuring of debt issued by territorial governments and their instrumentalities.  PROMESA provides a statutory framework for the creation of an independent oversight board with powers relating to, among other things, the development and implementation of fiscal plans for a designated territory or territorial instrumentality.  It also provides a statutory framework for collective action and judicial processes—separate from the Bankruptcy Code—by which a designated territory or territorial instrumentality may restructure its debt on a consensual or non-consensual basis.  The following is an overview of certain key provisions of the new law.
Oversight Board
Upon the enactment of PROMESA, an Oversight Board with budgetary and financial powers was established for Puerto Rico.  The Oversight Board will be comprised of seven voting members, as well as the governor (or his designee) who serves as an ex officio, non-voting member.  Apart from the governor, the other members are political appointees; the appointment process is ongoing at this time.  Under PROMESA, the President appoints one member at his sole discretion, while the other six voting members are to be selected by the President from lists submitted to him by U.S. Congressional leadership.  The Speaker of the House will submit two lists, with one list restricted to candidates residing or doing business in Puerto Rico.  One appointee is to be selected from the lists submitted by the Speaker of the House, the House Minority Leader, and the Senate Minority Leader, while two appointees are to be selected from the list submitted by the Senate Majority Leader.  The President may select individuals not on the lists provided by Congress; however, such nominees would be subject to Senate confirmation—whereas individuals from the lists do not require Senate confirmation.  If all appointments are not made by September 1, 2016, then the President must choose nominees to fill remaining vacancies from the appropriate lists by September 15, 2016.
Each member of the Oversight Board must:  (i) have expertise in finance, municipal bond markets, management, law, or the organization and operation of business or government; and (ii) not be an officer, elected official, or employee of the territorial government, a candidate for elected office of the territorial government, or a former elected official of the territorial government.
Responsibilities of the Oversight Board
Among the Oversight Board’s key responsibilities is facilitating the development of fiscal plans and budgets for the territory and designated territorial instrumentalities in accordance with certain articulated requirements and standards.  PROMESA makes clear that the governor is responsible for the development of fiscal plans and the governor or legislature, as appropriate, is responsible for the development of budgets.  The Oversight Board, however, has sole discretion to determine whether a fiscal plan is compliant with the requirements of PROMESA and whether a budget is compliant with the appropriate fiscal plan.  In addition, the Oversight Board is responsible for setting the schedule on which fiscal plans and budgets must be developed, submitted, approved, certified, and, if necessary, revised.
The Oversight Board is also responsible for reviewing actions by the territory government to ensure compliance with the appropriate fiscal plan and, if a law is not compliant, taking action to ensure that the action does not adversely affect the territorial government’s compliance with the fiscal plan.  In addition, the Oversight Board is responsible for determining whether a particularly entity satisfies the criteria for commencement of a case under Title III of PROMESA (described below) and is the only party that may submit a plan of adjustment in that case.  Further, the Oversight Board has various reporting and investigative responsibilities, including, if it determines that a pension system is materially underfunded, conducting an analysis—prepared by an independent actuary—of such pension system to assist the Oversight Board in evaluating the fiscal and economic impact of the pension cash flows.
Adjustment of Debt
In addition to establishing a statutory framework for the Oversight Board, PROMESA also provides two methods for the restructuring of debt issued by territorial governments and their instrumentalities:  (i) a collective action process under Title VI—resembling collective actions clauses common in sovereign debt; and (ii) a court-supervised process under Title III akin to proceedings under chapters 9 and 11 of the Bankruptcy Code.  Both methods require approvals from both the Oversight Board and a federal court—in the case of Puerto Rico and its instrumentalities, the United States District Court for the District of Puerto Rico.  And both methods include procedures by which holdouts may be bound by majorities in excess of two-thirds of the applicable debt/class; however, only Title III allows for impairment of a non-accepting class of creditors—i.e., “cram down”—under conditions that are largely the same as the Bankruptcy Code.  There is no requirement for an entity to pursue restructuring under Title VI before seeking relief under Title III; however, commencement of a Title III case requires the Oversight Board to certify that the entity has satisfied certain criteria, including that the entity made a good faith effort to reach a consensual restructuring prior to seeking relief under Title III.
Automatic Stay
PROMESA imposes a stay on certain types of creditor action against Puerto Rico and its instrumentalities until February 15, 2017.  If, however, either the district court or the Oversight Board confirms that additional time is needed to complete a collective action process under Title VI, the foregoing date would be extended by 60 days or 75 days, respectively.  The commencement of a case under Title III would also terminate the stay, but a new stay would take effect under the provisions of Title III.
PROMESA makes clear that the imposition of the stay does not prohibit Puerto Rico and its instrumentalities from making payments on debt that becomes due during the term of the stay and, to the extent feasible—as determined by the Oversight Board—Puerto Rico and its instrumentalities are required to make timely interest payments on outstanding debts throughout the duration of the stay.
Conclusion
The enactment of PROMESA is a significant development in bankruptcy jurisprudence.  Its full effect and utility, however, remain to be seen and will be tested as the newly enacted law is applied to the complex and demanding situation in Puerto Rico.
Gabriel Morgan is an Associate at Weil Gotshal & Manges, LLP in New York.