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Fiscal board has options for moving debt deal forward without enabling legislation


By The Star Staff


Although the island government repealed a 1940s law that would have allowed the Financial Oversight and Management Board to issue new debt without legislative approval, the board has other alternatives to implement the debt deal to restructure some $38 billion in Puerto Rico debt.


These include statutes in the Bankruptcy Code and the federal Puerto Rico Oversight, Management and Economic Stability Act (PROMESA) that can allow the debt deal to be implemented without legislative approval. The Title III court also does not require commonwealth legislation to render any new debt subject to New York law.


At a public meeting Friday convened by the oversight board to explain the seventh amended plan of adjustment, it was clear that the only dispute around the plan centers on the proposed 8.5% cut to pensions higher than $1,500 a month. Gov. Pedro Pierluisi Urrutia said that if U.S. District Court Judge Laura Taylor Swain gives the green light to pension cuts proposed in the debt plan, he will still make the needed $63 million yearly in payments to avoid the cuts. Oversight board member Antonio Medina declared that if the governor makes the pension payments, the board will not get in the way.


Medina said the board did not need legislation to put into effect the proposed pension cuts, but it needs legislation to issue bonds as part of the debt adjustment plan and to grant social security benefits to teachers and judges.


However, even if the Legislature does not approve the bills to enable the debt deal, the seventh amended plan of adjustment notes that there are alternatives, and lawyers appear to concur.


The plan contemplates that legislation will be enacted by the government on or prior to the plan’s effective date authorizing the issuance of new general obligation (GO) bonds and $1 billion in the form of a Contingent Value Instrument (CVI).


Creditors have the right to terminate their participation in the plan support agreement or debt deal if the legislation is not enacted prior to the start of the confirmation hearing on Nov. 8.


If the Legislature fails to enact the contemplated legislation, the oversight board will likely propose plan amendments providing alternatives to legislation.


“If the Legislation is not enacted on or prior to the commencement of the confirmation hearing, the oversight board may amend the Plan to provide treatments of claims not requiring the legislation,” the oversight board said. “The plan amendments may require the oversight board to request an adjournment of the confirmation hearing to allow time for supplemental disclosure and voting, if necessary. If the commonwealth’s existing legislation authorizing refinancings suffices, no adjournment may be necessary. The affected creditors will have opportunities to negotiate consensual amendments with the oversight board. If creditors and the oversight board do not reach consensus, the oversight board may request that the court confirm such an amended plan over the objections of classes of claims that do not accept the amended plan.”


The oversight board believes there are several means to satisfy confirmation requirements for an amended plan of adjustment that provides the substantive equivalent of the new bonds and contingent value instruments in the current plan, but without the legislation.


Those means are contained in three sections of the Bankruptcy Code, which is supplemental to PROMESA, and one section of PROMESA. Section 1123 of the Bankruptcy Code provides that a plan shall provide adequate means for its implementation such as the issuance of securities of the debtor.


“Therefore, the Oversight Board believes the Title III Court can and should confirm and approve issuance of the New GO Bonds, the GO CVIs, and the Clawback CVIs,” the debt deal says.


Bankruptcy Code section 1142 will allow the Title III court to direct the debtor and any other necessary party to execute or deliver any instrument required to affect a transfer of property dealt with by a confirmed plan, and to perform any other act necessary for the consummation of the plan.


Section 105 of the Bankruptcy Code provides that the Title III court may issue any order necessary or appropriate to carry out Title III, and the Title III court may take any action or make any determination necessary or appropriate to enforce or implement its orders.


“Finally, PROMESA section 305 provides the Title III Court can, by order, interfere with the political and governmental powers of the debtors, the property and revenues of the debtors, and the use or enjoyment by the debtors of any income-producing property, if the Oversight Board consents or the plan so provides,” the plan says. “Accordingly, the Title III Court may approve securities issued by the reorganized debtor under the plan and may enforce the Plan and its implementation.”


“While no legislative assembly can bind future legislative assemblies not to repeal or amend laws, the Title III Court’s orders cannot be repealed or amended by the present or any future legislative assembly,” adds the plan. “Therefore, the Title III Court’s order may be superior to any non-impairment statute the Legislature can enact.”


The Title III court also does not require commonwealth legislation to render any new debt subject to New York law. The Title III Court is empowered to confirm and enforce the terms of the plan such as any provisions providing New York law will govern certain new debt.

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