Puerto Rico's Governor Alejandro Garcia Padilla today introduced debt restructuring legislation which, upon enactment, would provide a judicial debt relief process in Puerto Rico's courts for certain public corporations, including the Puerto Rico Electric Power Authority ("PREPA"), the Puerto Rico Aqueduct and Sewer Authority ("PRASA") and the Puerto Rico Highways and Transportation Authority ("PRHTA"). Despite a semantic effort at today's press conference by the Governor and in the legislative preamble to distinguish the proposed legislation from "bankruptcy" legislation, the legislation is modeled on Chapter 9 and Chapter 11 of the U.S. Bankruptcy Code (with some significant distinctions) and is in all practical respects a non-federal bankruptcy statute. The Governor urged Puerto Rico's legislature to adopt the proposed legislation by June 30, and enactment is considered a virtual certainty.
Under the proposed legislation, entitled "The Puerto Rico Public Corporation Debt Enforcement and Recovery Act," an eligible public corporation may pursue either or both of two alternatives, simultaneously or sequentially. The first is a "consensual debt relief transaction" (which can be analogized to a "prepack" and will likely be known as a "Chapter 2″ proceeding.) To initiate a Chapter 2 proceeding, an eligible entity files a notice of "suspension period" on its website, which notice stays any remedial action by any creditor identified in such notice for a period of up to 360 days if the entity does not seek court approval of specified debt relief, or, if such approval is requested, until the final unappealable approval of such relief or 60 days following denial of such relief.
The applicable consensual debt relief in a Chapter 2 proceeding may only be approved by the court if at least 50% of the amount of debt within a class of substantially similar debt identified by the issuer participates in a vote or consent solicitation relating to the proposed amendments, modifications, waivers or debt exchanges relating to the applicable debt, and at least 75% of the amount of debt in such class that so participates approves the proposed relief. If so approved, the applicable debt relief is purportedly binding on all creditors within the applicable class.
The second avenue for debt relief (which will likely be known as a Chapter 3 proceeding) involves the filing of a petition with the court by, or on behalf of, an eligible public corporation, which...