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Governor Garcia Padilla expressed today that he will sign into law the bill creating the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Act”). The Act is applicable to the Puerto Rico Electric Power Authority (“PREPA”), the Puerto Rico Aqueduct and Sewer Authority, the Puerto Rico Ports Authority, the Puerto Rico Highways and Transportation Authority and the Metropolitan Bus Authority, among others.
According to the preamble, the purpose and objective of the Act is to: (1) allow public corporations to adjust their debts in the interest of all creditors; (2) provide procedures for the orderly enforcement and, if necessary, the restructuring of debt; and (3) maximize the returns to all stakeholders based on each debtor’s capacity to pay. The Act mirrors certain key provisions of Chapters 9 and 11 of the U.S. Bankruptcy Code.
The Act contemplates two types of procedures. The first is a negotiated debt modification procedure that would result in a recovery program (Chapter 2 of the Act), and the second is a court-supervised procedure that would culminate in an orderly debt enforcement plan (Chapter 3 of the Act).
Chapter 2 of the Act
Chapter 2 provides a mechanism for a public corporation to adopt a recovery program and seek a negotiated solution for debt relief, based on the recovery program that binds all debt holders with the consent of a majority of said debt holders. The relief available under Chapter 2 consists of any combination of amendments, modifications, waivers, or exchanges to the affected debt instruments, so long as the amendments are coupled with the public corporation’s commitment to be bound by the recovery program.
The process under Chapter 2 includes a suspension of payments period or stay period. After a public announcement of the suspension period is made, all remedies otherwise granted to holders of, parties with a beneficial interest in, and trustees and indenture trustees and similar representatives related to the affected debt instruments are temporarily suspended for a sufficient period of time to allow the public corporation to engage in discussions with stakeholders, seek the required consent from holders, and obtain court approval of the amendments.
Chapter 2 establishes an oversight commission comprised of three independent experts appointed by the Governor to monitor the public corporation’s compliance with the recovery program after the consent of debt holders and that court approval is obtained, and to provide periodic compliance updates to stakeholders and the public.
Chapter 3 of the Act
Chapter 3 addresses the debt problem of the Commonwealth’s public corporations through a judicial solution which follows a model similar to that of Chapter 9 of the U.S. Bankruptcy Code. Contracts and collective bargaining agreements may be modified or rejected under certain circumstances and trade debt can be reduced when necessary.
To be eligible for Chapter 3, a petitioner must be: (1) currently unable, or at serious risk of being unable to pay valid debts as they mature while performing its public functions without additional legislative or financial assistance; (2) ineligible for relief under Chapter 11 of the U.S. Bankruptcy Code; and (3) authorized to file a petition by its governing body and the Government Development Bank (“GDB”), or by GDB at the Governor’s request on behalf the public corporation.
The petition must contain information about the types and amounts of claims the petitioner intends to affect under its debt enforcement plan. Any actions for payment of such claims are stayed as of the date the petition is filed, channeling their adjudication into a single forum—the designated courtroom within the Court of First Instance, San Juan Part, established by the Act.
The petitioner has the power to assign or reject contracts to which it is party; if the Court finds it is in the petitioner’s best interests. Counterparties to rejected contracts will be left with claims for breach of contract to be treated under the petitioner’s plan.
Only the petitioner or GDB, upon the Governor’s request, may propose a debt enforcement plan under Chapter 3. Creditors must be separated into different classes (based upon different collateral security, priorities, or rational bases for classifying similar claims separately) for treatment under the plan. Plan treatment must be such that every affected creditor receives payments and/or property having a present value of at least the amount the claims in the class would have received if all creditors holding claims against the petitioner had been allowed to enforce them on the date the petition was filed and the distributions are maximized under the circumstances.
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