Restructuring Sovereign Debt and Rebuilding a National Economy for a Failing State: The Case of Venezuela

By Steven T. Kargman (Kargman Associates/International Restructuring Advisors)

Steven T. Kargman

Venezuela is facing a veritable perform storm: a major humanitarian crisis, a collapsing economy, a sovereign debt crisis, and a political stalemate between the ruling Maduro regime and the opposition.  Yet, if and when Venezuela tries to come to terms with these very serious challenges (probably under the auspices of a new Venezuelan government), Venezuela will first and foremost need to address the pressing social needs of the Venezuelan people, but it will also need to undertake the monumental task of rebuilding its national economy and restructuring its sovereign debt that has been estimated to be $150 billion or more.

In a new article entitled “Venezuela: Prospects for Restructuring Sovereign Debt and Rebuilding a National Economy Against the Backdrop of a Failing State,” I discuss the prospects for a sovereign debt restructuring as well as the major legal and policy challenges associated with a program of sovereign debt restructuring and national economic reconstruction.  For any future sovereign debt restructuring, Venezuela will need to consider employing a broad range of restructuring tools, both old and new.  Further, for any future economic reconstruction effort, Venezuela will need to consider strategies for rebuilding its national oil industry as well as strategies for diversification of its economy.

The article originally appeared in AIRA Journal, Vol. 34, No. 2 (May 2021) and is reprinted with the permission of its publisher, the Association of Insolvency & Restructuring Advisors (AIRA).  The article can be found here.  (The article was first posted on the CLS Blue Sky Blog of Columbia Law School (May 18, 2021) and is cross-posted here with the permission of the CLS Blue Sky Blog.)

Restructurings in Emerging Economies One Year into the COVID-19 Pandemic

By Steven T. Kargman (Kargman Associates/International Restructuring Advisors)

Steven T. Kargman

A new article entitled “The COVID-19 Pandemic and Emerging Market Restructurings: The View One Year Later” provides an overview of the challenging economic landscape that continues to face many emerging economies in the wake of the COVID-19 pandemic, and it also discusses current sovereign debt restructuring and corporate debt restructuring issues in the emerging economies.
The article provides an analysis of sovereign debt restructuring situations involving a serial defaulter (Argentina) and failing states (Venezuela and Lebanon). It also reviews the sovereign debt restructuring travails of an African state, Zambia, that may have implications for future sovereign debt restructurings in Sub-Saharan Africa in light of the intercreditor tensions that arose in the Zambian case between Chinese creditors and bondholders.

Even though corporate defaults in the emerging economies were fairly muted over the last year, many observers expect a surge of corporate defaults, restructurings, and non-performing loans (NPLs) in the emerging economies and developing countries in the coming years, particularly as the special COVID-related responses of governments come to an end. Nonetheless, if and when there is a sharp increase in insolvencies in emerging market jurisdictions, this could pose a major problem for the court systems in the emerging economies and developing economies given the limited capacity of many of these systems to deal with a large volume of cases. Thus, there may well be a need for greater reliance on out-of-court restructurings to address this expected surge in insolvency cases in the emerging economies and developing countries.

The article originally appeared in International Insolvency & Restructuring Report 2021/22 and is reprinted with the permission of its publisher, Capital Markets Intelligence. The article can be found here.

Reviewing Redwater: An Analysis of the U.S. and Canadian Approaches to Environmental Obligations in Bankruptcy

By Laura N. Coordes (Associate Professor of Law, Arizona State University – Sandra Day O’Connor College of Law)

Laura N. Coordes

The United States and Canada have both seen significant litigation over the treatment of environmental obligations in bankruptcy proceedings. Both countries also have robust regulatory and statutory frameworks with respect to bankruptcy and environmental law, making the two jurisdictions ripe for comparison.

Although the U.S. legal landscape differs somewhat from Canada’s, courts in both countries have struggled to sort out the treatment of environmental obligations in bankruptcy. However, in 2019, the Supreme Court of Canada decided Orphan Well Association v. Grant Thornton Limited (“Redwater”), which characterized environmental obligations, not as claims, but as duties owed to the public that could not be compromised in bankruptcy. Meanwhile, U.S. courts continue to grapple with the question of how to treat a company’s environmental obligations in bankruptcy.

This article analyzes the impact of Redwater and highlights issues that U.S. scholars and policymakers should consider as they press for changes. In particular, the article focuses on three questions: (1) What is the role of the legislature as compared to the judiciary? (2) What is the role of federal law, as compared to provincial or state law? and (3) What is the role of the public interest?

These three questions implicate debates that go beyond the immediate issue of the role of environmental law in bankruptcy proceedings. However, considering environmental and bankruptcy law in light of these universal issues illuminates unresolved tensions that both the U.S. and Canada will likely continue to face on a larger scale.

The full article is available here.

Reorganization of Corporate Groups in Brazil: Substantive Consolidation and the Limited Liability Tale

By Sheila C. Neder Cerezetti (Professor of Law, University of São Paulo Law School)

Sheila C. Neder Cerezetti

As argued by prominent Brazilian scholars, some of the most relevant attributes of the corporate form – limited liability and asset partitioning – might be considered just a tale in Brazil, as they have been consistently and subsequently weakened by a variety of reasons.

In light of this and of the large number of corporate reorganization cases involving groups of companies, which gave way to a series of unsubstantiated applications of substantive consolidation, the article raises the debate on the correct use of the mechanism in the country.

I question whether the lenient approach to substantive consolidation by Brazilian courts (i) is a natural consequence of the weakening of limited liability and asset partitioning, and (ii) represents a better way to recognize the Brazilian corporate reality, bringing more truth to reorganizations.

In the attempt to answer these questions, the article introduces the basic aspects of corporate reorganization in Brazil, offering a comprehensive overview of the Brazilian Bankruptcy Act (Law No. 11,101/2005). The description addresses the broad use of procedural and substantive consolidation even if, at the time, the Brazilian Bankruptcy Act lacked provisions for proceedings with multiple debtors. It shows that the permissive approach first directed to procedural consolidation slowly unraveled into a silent acceptance of substantive consolidation.

Next, the article explores some of the uses of substantive consolidation in the USA (where the mechanism started and gained traction) and in the UNCITRAL Legislative Guide on Insolvency Law (an important indicator of what might be adopted in other jurisdiction in the future), with a brief reference to the status of the matter in the European Union. In these cases, a set of prerequisites have been established to determine when the exceptional measure of the mechanism is appropriate.

In contrast, I call a misuse the often-unsubstantiated acceptance of substantive consolidation in Brazil, that fails to note its exceptionally. In the vast majority of cases, substantive consolidation actually happened in proceedings where none of the parties and not even the court expressly addressed the issue and implicitly just treated a single plan as something normal, although it mixed assets and liabilities of different debtors. And in those cases where the matter has been expressly addressed, the criteria for ordering the consolidation (i) varied greatly, to the point that it could not be rationalized in the form of a test, and (ii) failed to treat the remedy as an exceptional tool.

In light of the mentioned “tale of limited liability in Brazil”, one could wonder if such a misuse of substantive consolidation is in fact inappropriate. However, I argue that this tale is not so severe as to justify the lenient approach described, in view of the rules on corporate groups as well as of the fact that strictly commercial and civil relationships are, for the most part, protected from the exceptions to limited liability.

The article contends that there still is a compelling case for a stricter use of substantive consolidation, considering, among other reasons, that accepting the lenient criteria for ordering substantive consolidation would mean further weakening the attributes of the corporate form. It concludes by pointing to other tools in bankruptcy law that can better deal with the exceptions to the limitation of liability, and argues that substantive consolidation should remain a remedy for abuses of the corporate form that turn it dysfunctional.

Finally, it should be noted that a recently approved bill included provisions on procedural and substantive consolidation in the Brazilian Bankruptcy Law, ratifying the lenient approach described in the article. The article also serves as an explanatory description of the pathways that led the Brazilian legal system to such a discipline and as a warning about the perils of following this route.

The full article is available here.

Bankruptcy Shopping: Domestic Venue Races and Global Forum Wars

By Anthony J. Casey (Professor, The University of Chicago Law School) and Joshua Macey (Assistant Professor, The University of Chicago Law School)

Anthony J. Casey
Joshua Macey

The United States Bankruptcy Code gives debtors wide discretion to reorganize in the venue of their choice. These lenient venue selection rules long have allowed bankruptcy courts in the District of Delaware and the Southern District of New York to dominate the market for large Chapter 11 cases, though recently the Southern District of Texas has also begun to attract a large number of cases.

This state of affairs has produced a vigorous debate. Critics of liberal venue rules charge that bankruptcy districts are engaged in a “race to the bottom” as judges compete for blockbuster cases. Others counter that competition for cases improves efficiency and predictability as judges develop expertise in overseeing large Chapter 11 cases.

This Article cautions that developments in foreign jurisdictions may limit the effectiveness of these venue reform proposals. In recent years, foreign jurisdictions have emerged as convenient forums for distressed debtors. For instance, in many cases, the English scheme of arrangement now represents a viable alternative to the American bankruptcy system, and over the past decade, a number of companies have chosen to use an English scheme of arrangement to restructure their debt instead of chapter 11, with the first United States-headquartered business doing so in 2019. Other jurisdictions have also sought to entice foreign debtors, with insolvency specialists speculating that Singapore, in particular, could become a restructuring hub.

Because American bankruptcy courts freely recognize foreign insolvency proceedings, firms that are directed to file in less favored districts may instead choose to reorganize in a foreign jurisdiction. In this environment, attempts to limit venue selection within the United States will have the opposite of their intended effect, replacing domestic venue shopping with even worse global forum shopping. By ignoring the availability of global forums, current venue reform proposals could, perversely, drive opportunistic debtors and creditors to restructure in foreign jurisdictions.

To address this, we argue that, rather than limit domestic venue choice, lawmakers should: (1) support the development of ex ante commitment to mechanisms for choosing venue and forum; and (2) whenever possible, resolve inconsistencies in substantive law across venues and forums. These are general principles of reform, and the implementation will depend on context. For example, commitment mechanisms look different for venue than they do for forum. But, if designed properly, these measures can reduce the costs of venue and forum shopping without giving up the benefits that come from allowing some choice of venue and forum.

It is worth noting that the merits of our proposal are independent of one’s view on the current state of venue shopping. If venue shopping is a real problem, the principles we introduce address that problem. If venue shopping is not a problem, the principles do no harm and even expand the choice set for debtors. Similarly, while the principles address the problem of global forum shopping, the benefits with regard to venue shopping exist with or without global forums. The same cannot be said of the status quo or the reforms currently being considered.

The article can be found here.

An Assessment of the UK Restructuring Moratorium

By Jennifer Payne (Linklaters Professor of Corporate Finance Law, University of Oxford)

Jennifer Payne

In a recent paper I analyze the introduction of a restructuring moratorium into the UK by the Corporate Insolvency and Governance Act 2020 (2020 Act). This is one of a number of permanent measures introduced by the 2020 Act that are intended to facilitate the rescue of financially distressed but viable companies. The introduction of these measures was prompted by the financial problems arising from the COVID-19 pandemic, but the restructuring moratorium has its foundations in a set of 2018 Government proposals and a 2016 Insolvency Service consultation paper.

A number of jurisdictions have introduced reforms to their debt restructuring regimes in recent years, often based on the US Chapter 11 procedure which many regard as the ‘gold standard’ of restructuring mechanisms. These include the 2017 debt restructuring reforms introduced in Singapore and the EU’s recent Restructuring Directive (Directive 2019/1023). The inclusion of a restructuring moratorium is a consistent feature in these reforms. This paper compares the UK restructuring moratorium with those introduced elsewhere and assesses whether it will be a valuable tool for financially distressed companies. This paper argues that the constraints and limitations placed on the UK restructuring moratorium, for creditor protection and other reasons, limit the potential value of this mechanism for financially distressed companies to a significant extent and that many companies will therefore have to continue to look elsewhere for protection from creditors seeking to disrupt their restructurings.

Moratoria have existed as integral aspects of mechanisms such as US Chapter 11 and UK administration for some time but the existence of a broad moratorium for use in conjunction with restructuring mechanisms is new in the UK. Moratoria are traditionally regarded as having two benefits. The first is to deal with the ‘common pool’ problem. If there is no stay, then creditors may seize assets that are useful for the carrying on of the debtor’s business and this could jeopardize the prospects of a successful restructuring. The second is that a moratorium can deal with the ‘anti-commons’ problem, i.e. it can block actions by individual creditors who are seeking to frustrate the wishes of the majority. A balance is required between the benefits to the company and the creditors as a whole on the one hand and the rights of the individual creditors on the other.

The 2020 Act introduces a new Part A1 into the Insolvency Act 1986. This provides a restructuring moratorium that is standalone and is not a precursor to an insolvency process, although it can be used in that way. It is available to be used alongside restructuring processes including schemes of arrangement, Company Voluntary Arrangement (CVAs) and the new restructuring plans (or ‘super schemes’) introduced into Part 26A of the Companies Act 2006 by the 2020 Act.  In contrast to the moratorium attached to administration, the UK restructuring moratorium is debtor-in-possession and allows directors to continue to run a company, subject to the appointment of a licensed insolvency practitioner (the monitor) and other restrictions. Broadly, the effect is to impose both a constraint on the ability of creditors to assert their debt claims against the company and a constraint on initiating insolvency proceedings and other legal processes, complemented by restraints on ipso facto clauses.

Given that moratoria involve a significant constraint on creditors’ legal rights, they can be justified only where the imposition can be regarded as beneficial to the creditors as a whole, in order to rescue a viable (albeit financially distressed) business. One concern is that they can be used by directors to prop up a company which is not economically viable and is not capable of rescue. Another is that directors may utilise a restructuring to shake off liabilities which the company is capable of meeting. A number of protections are introduced by the 2020 Act to deal with these concerns, including a limit on the length of the moratorium (20 days, extendable for a further 20 days without creditor consent), eligibility requirements, the appointment of an insolvency practitioner (a monitor), a restriction on the availability of the moratorium to certain companies, and the ability of creditors to challenge the moratorium in certain circumstances. While there is no doubt that restructuring mechanisms and the moratoria that attach to them can be misused by companies and powerful financial creditors, the balance may have tipped too far in these provisions, rendering the UK restructuring moratorium much less valuable for companies than might have been hoped.

A version of this note first appeared in the Oxford Business Law Blog.

 

Chapter 15 and Bankruptcy Credit Events under Credit Default Swaps

By Corinne Ball, George Cahill, Kay Morley, Jay Tambe, Bruce Bennett, & Heather Lennox (Jones Day)

Corinne Ball
George Cahill
Kay Morley
Jay Tambe
Bruce Bennett
Heather Lennox

A recent spate of decisions by the EMEA Determinations Committee (“DC”) has provided clarity on when a chapter 15 filing will trigger a “Bankruptcy” credit event under credit default swaps.  Each of the relevant chapter 15 petitions sought recognition of an English scheme of arrangement, which is not a product of insolvency law and does not necessarily constitute a Bankruptcy, and each underlying scheme was considered narrow enough in scope to not be “with or for the benefit of its creditors generally” (triggering limb (c) of Bankruptcy).  As such, the primary issue in each determination was whether the relief sought in the chapter 15 was similar to a “judgment of insolvency or bankruptcy” and independently triggered limb (d) of Bankruptcy.

The DC found that Thomas Cook’s 2019 petition for recognition of its scheme as a foreign nonmain proceeding, which expressly waived the benefit of the stay courts can impose in such cases, was not similar to an insolvency judgement and did not constitute a Bankruptcy.  On the contrary, it held that Matalan’s August petition seeking recognition of a foreign main proceeding (involving an automatic stay) was similar and triggered a Bankruptcy.  In its October determination regarding Selecta, the DC addressed the intermediate scenario, a petition seeking a stay in connection with a foreign main proceeding, finding that this also triggered a Bankruptcy.  While every situation must be considered on its own facts, these determinations should prove instructive on when a chapter 15 filing will trigger a Bankruptcy credit event.

Disclaimer Statement: “The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect views or opinions of the law firm with which they are associated.”

The full article is available here.

Singapore Schemes of Arrangement: Empirical and Comparative Analysis

By Wai Yee Wan (City University of Hong Kong), Casey Watters (Bond University), and Gerard McCormack (University of Leeds)

Wai Yee Wan
Casey Watters
Gerard McCormack

The scheme of arrangement, brought to Singapore through a transplantation of English law, provides one of the most flexible debt restructuring tools for companies. In 2017, Singapore enacted substantial reforms to its insolvency laws, transplanting elements of US Chapter 11, including a moratorium, rescue financing, and cross-class cramdown, into the flexible Singapore restructuring regime. Our paper (published recently in the American Bankruptcy Law Journal) addresses the effectiveness of English-modelled schemes as debt-restructuring tools in Singapore, both pre-2017 reforms and as a hybrid with elements of Chapter 11.

The English scheme of arrangement has been spoken of as a model for ‘early stage’ restructuring procedures. Although the scheme functions as Singapore’s de facto debtor-in-possession restructuring regime, it does not have any bankruptcy or insolvency stigma since it is a procedure based on company law rather than insolvency law. It is activated by the filing of documents with the court and an application to the court to convene meetings of relevant creditors to approve the scheme. The meeting of creditors under schemes is substantially similar to those conducted in Chapter 11 cases under § 341 of the US Bankruptcy code. Creditors whose rights are altered by the scheme are grouped into classes with creditors holding similar legal rights.

This is the first empirical study to date that comprehensively examines schemes of arrangement, including non-reported schemes, over a period. To this end, it employs a mixture of quantitative and qualitative data. To assess the schemes framework in Singapore, we conducted a study of schemes in three parts based on data availability. First, we examine the filings in court-sanctioned schemes of arrangement for the period 1996–2004 (with reported judgments). This period covers the Asian financial crisis of 1997 and includes private and publicly traded companies. Second, similarly, we examine the filings for schemes of arrangement with reported judgments for the period 2006–2015. This period covers the global financial crisis of 2008. We extended the database by including filings in court-sanctioned schemes of arrangement for SGX-listed companies, including non-reported judgments. Third, we examined the filings in court-sanctioned schemes between January 1, 2016 and May 22, 2019. May 22, 2019 was selected as it is the second anniversary from the date that the 2017 reforms came into force. We are able to have a wider sample size because cases during the latter period were tracked by the Supreme Court Registry. On examining the filings, we coded a number of variables related to the schemes of arrangement, including financial information related to the companies, class composition and outcomes of the schemes. Such data were manually collected and coded from all the filings, which were provided by the Singapore Supreme Court.

From our analysis of the data, we identified multiple characteristics of successful schemes, the most significant of which are controlling shareholder support and availability of new financing, often provided by the controlling shareholder. When present, disputes have centred on insufficient disclosure, with informational asymmetry a substantial concern identified in the study. Liquidation values were often missing and, when present, lacked a detailed bases for the stated values.

The results of the empirical study demonstrate the effectiveness of schemes as a debt restructuring tool for large insolvent companies. The scheme reforms, along with other insolvency reforms in Singapore, including adoption of the UNCITRAL Model Law on Cross-Border Insolvency, recent common law developments, and removing a ring-fencing provision that protected domestic creditors at the expense of foreign creditors, provide additional tools and lower barriers to restructuring in Singapore. The flexibility of schemes coupled with Chapter 11 tools make schemes an attractive debt restructuring option for many insolvent companies.

The full article is available here.

For related Roundtable posts, see Gerard McCormack and Wai Yee Wan, Transplanting Chapter 11 of the US Bankruptcy Code into Singapore’s Restructuring and Insolvency Laws. 

Towards an Optimal Model of Directors’ Duties in the Zone of Insolvency: An Economic and Comparative Approach

By Aurelio Gurrea-Martínez (Singapore Management University)

Aurelio Gurrea-Martínez

When a company becomes factually insolvent but it is not yet subject to a formal insolvency proceeding, the shareholders—or the directors acting on their behalf—may engage, even in good faith, in various forms of behaviour that can divert or destroy value at the expense of the creditors. For this reason, most jurisdictions around the world provide a variety of legal strategies to respond to this form of shareholder opportunism. One of these strategies is the imposition of special directors’ duties in the zone of insolvency.

In a recent article, I analyse the primary regulatory models of directors’ duties in the zone of insolvency observed internationally. From a sample of more than 20 countries from Asia, Australia, Europe, Latin America, Africa, and North America, I distinguish six primary regulatory models: (i) the imposition of a duty to initiate insolvency proceedings, generally found in Europe; (ii) the imposition of a duty to recapitalise or liquidate the company, typically existing in Europe and Latin America; (iii) the imposition of duties towards the company’s creditors, including the duty to minimise losses for the creditors existing in the United Kingdom; (iv) the imposition of a duty to prevent the company from incurring new debts, existing in countries like Australia and South Africa; (v) the imposition of a duty to prevent the company from incurring new debts that cannot be paid in full, existing in Singapore and New Zealand; and (vi) the imposition of a duty to keep maximising the interest of the corporation, as it exists in Canada and the United States.

After analysing the features, advantages, and weaknesses of these models, my paper argues that the desirability of each regulatory model of directors’ duties in the zone of insolvency depends on a variety of country-specific factors including divergences in corporate ownership structures, debt structures, level of financial development, efficiency of the insolvency framework, and sophistication of the judiciary. For instance, in small and medium-sized enterprises (SMEs) as well as large controlled firms, there is a greater alignment of incentives between directors and shareholders. Therefore, in the event of insolvency, the directors will have more incentives to engage in a series of opportunistic behaviour that will advance the shareholders’ interests even if it is at the expense of the creditors. As a result, a more interventionist approach to protect the creditors, such as the duty to initiate insolvency proceedings, may make more sense in countries with a significant presence of SMEs and large controlled firms, as it happens in most jurisdictions around the world. By contrast, in countries like the United Kingdom and the United States, where large companies usually have dispersed ownership structures and therefore the directors are less influenced by the shareholders, a more flexible approach for the regulation of directors’ duties in the zone of insolvency may be more justified. Therefore, a duty to keep maximising the interest of the company or a duty to take steps to minimise potential losses for the creditors may make sense.

Nonetheless, country-specific factors other than corporate ownership structures can also affect the desirability of each regulatory model of directors’ duties in the zone of insolvency. For example, in countries without sophisticated courts, the discretion of courts should be reduced. Therefore, the imposition of clear rules (e.g., duty to initiate insolvency proceedings) may be more desirable than the use of standards (e.g., duty to minimise losses for the creditors or duty to keep maximising the interest of the corporation). Similarly, in countries with inefficient insolvency frameworks, initiating an insolvency proceeding can do more harm than good for both debtors and creditors. Therefore, these countries should not impose a duty to initiate insolvency proceedings even if, as it happens in many jurisdictions with inefficient frameworks (e.g., emerging economies), this solution makes more sense from the perspective of the corporate ownership structure prevailing in the country.

Based on a comparative, interdisciplinary, and country-specific analysis, my articles provides various policy recommendations to enhance the regulatory framework of directors’ duties in the zone of insolvency across jurisdictions taking into account international divergences in corporate ownership structures, debt structures, level of financial development, efficiency of the insolvency framework, and sophistication of the judiciary.

The full article is available here.

A modified version of this post was published on the Singapore Global Restructuring Initiative Blog.

Puerto Rico; Act III

By Stephen J. Lubben (Seton Hall University School of Law)

Stephen J. Lubben

Since 2017, the Commonwealth of Puerto Rico (and certain of its affiliated entities) have been in “bankruptcy” under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”).  PROMESA is a bankruptcy law, with various other bells and whistles, although Congress purported to enact it under its Article IV territories powers.

These cases are pending in the United States District Court for the District of Puerto Rico; however, Judge Laura Taylor Swain, of the Southern District of New York, was appointed by the Chief Justice to preside over the cases.  My new paper – Puerto Rico; Act III – provides a concise overview of where things now stand in the PROMESA process, and where they might be heading.

In addition to its restructuring provisions, the law creates the Financial Oversight and Management Board for Puerto Rico.  The Board frequently states that “the purpose of the Oversight Board is to provide a method for Puerto Rico to achieve fiscal responsibility and access to the capital markets.”  In essence, the Board operates as a supra-governmental body for fiscal matters.

At present several members of the Board have stepped down, and President Trump bumped one member off the Board – former bankruptcy judge Arthur J. González – by appointing a new member to his slot.  Congress and the president will have to fill out the Board, or devise a new path for the Commonwealth.

In the face of hurricanes, earthquakes, and COVID-19, the Board has attempted to push forward with a reorganization under Title III.  The virus, however, might substantially delay the process and force a reconsideration of the present reorganization plan.  It thus represents the opening of a third act in Puerto Rico’s debt drama.

Even before recent events, I had argued that the Board was being far too timid in its efforts to revamp Puerto Rico’s economy, given that the PROMESA process was presumably a one-time opportunity.  In particular, the debt relief the Board was proposing was comparatively modest, and I worried that it might leave the Commonwealth with still too much debt to successfully restart its economy.

The problem is that the Board’s current plan has the support of almost nobody, making even “cramdown” of the plan extremely unlikely.  Pensioners might be the most likely ally with the Board, although the government of Puerto Rico, and presumably many of the pensioners, object to the current offer.  As Justice Sotomayor recently noted,

The Board’s decisions have affected the island’s entire population, particularly many of its most vulnerable citizens. The Board has ordered pensions to be reduced by as much as 8.5 percent… Other proposed cuts take aim at already depleted healthcare and educational services. It is under the yoke of such austerity measures that the island’s 3.2 million citizens now chafe.[1]

Indeed, Justice Sotomayor’s recent opinion also provides a kind of roadmap for a challenge to PROMESA.  She explains that she concurred in the Court’s result only because nobody had argued that Puerto Rico’s Commonwealth status was inconsistent with the creation of the Board.  As she sees it, Congress made certain commitments to Puerto Rico in the 1950s when it created the Commonwealth, and Congress may not “take back” those commitments.  Any litigation following her approach would presumably involve extensive appeals, but it looms as a threat to the PROMESA process.

At heart, the problem in Puerto Rico is not unlike the problem in many sovereign and municipal workouts.  The bondholders want to recover as much as possible, of course, and are leery of settling claims only to see the debtor rebound shortly thereafter.  The conundrum being that the rebound is unlikely to happen without serious debt reduction.  Debt reduction is often not the only requirement for a rebound, but it is fundamental.

Either the Board needs to lead Puerto Rico out of this feedback loop, or Puerto Rico needs to extract itself from the PROMESA process. If not, the drama will continue for many more acts.  Future acts could in theory include statehood for Puerto Rico, or some new restructuring process, or perhaps even both.  Or the parties may simply reach a deal on a plan.  At this point it is hard to say any particular outcome is more likely than another.

[1] Financial Oversight And Management Bd. For Puerto Rico v. Aurelius Investment, LLC, 590 U. S. ____ (2020), Sotomayor, J., concurring in judgment, slip opinion at page 7.

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