Op-Ed: The right deal for Puerto Rico Rests of Four Principles

Op-ed by the member of the Oversight Board: David A. Skeel David Skeel is the Chairman of the Financial Oversight and Management Board for Puerto Rico. He is the S. Samuel Arsht Professor of Corporate Law at the University of Pennsylvania Law School and the author of several books, including Debt’s Dominion: A History of Bankruptcy Law in America.

After yet another calamitous year, 2021 is an opportunity for Puerto Rico to both start fresh and complete one of its most important goals: restructuring the debt.

Before the COVID-19 crisis hit last March, the Financial Oversight and Management Board for Puerto Rico, which is tasked with resolving the largest municipal bankruptcy in U.S. history and help Puerto Rico achieving fiscal responsibility, had filed a proposed plan of adjustment. But COVID-19 dramatically changed the picture. The Oversight Board, which I chair, focused first on making immediate financial assistance available to the people of Puerto Rico. We also carefully assessed the long-term effect of the pandemic and considered how to reduce its impact on the Puerto Rico economy.

Only then did we turn our attention back to Puerto Rico’s debt. The effects of COVID-19 on Puerto Rico are severe and Puerto Rico’s capacity to repay its debt has changed. Our objective in the debt restructuring process, however, have not.  

Four key principles guide the Oversight Board in the restructuring process. First, consensual is better.  The more classes of creditors vote in favor of our proposed restructuring, the smoother our path to completion is likely to be and the less we spend on costly and lengthy litigation.  We have been very successful in reaching consensual agreements in the restructurings that have already been achieved for COFINA, the Government Development Bank., and the Puerto Rico Aqueduct and Sewer Authority.

Second, adjust to reflect the new reality. The fact that the pandemic hit Puerto Rico when it was already down, severely damaged by hurricanes and earthquakes and weakened by decades of economic decline and fiscal mismanagement has made the situation even worse than it otherwise would have been. Puerto Rico cannot afford to pay its creditors amounts that would have been reasonable one year ago. The repayment obligations must not cripple Puerto Rico’s economy going forward, but instead result in a structurally sound government.

Third, meet PROMESA’s requirements for a fair deal. Two of PROMESA’s most important fairness requirements are that the restructuring be “feasible” and that it be in the “best interests” of the creditors. The feasibility requirement means that the court will not approve the restructuring unless it is affordable and sustainable for Puerto Rico. The best interests test requires that creditors as a whole do as well as they would if PROMESA had never been enacted and the creditors scrambled to collect whatever they could when Puerto Rico was unable to pay. 

Finally, a “once and done” deal. From day 1, the Oversight Board has set its sights on an agreement that is affordable for Puerto Rico not only today and tomorrow, but for years to come. That’s why the Certified Fiscal Plan provides projections of the government’s expenses for as long as it will take for Puerto Rico to pay off the reduced amounts of its debt. 

We do not believe Puerto Rico can default and restructure its debts more than once. Businesses sometimes file for bankruptcy a second time, and a few countries like Argentina have restructured their debt more than once. But for Puerto Rico, a future default would be disastrous. It would be disruptive and would interfere with important initiatives the government may wish to undertake. Indeed, Puerto Rico may not even have access to PROMESA’s restructuring provisions after the Oversight Board is dissolved in a few years, removing an enormous benefit for Puerto Rico.  

Puerto Rico’s bankruptcy needs to be resolved as soon as reasonably possible.  The judge clearly agrees—she has given us a deadline of February 10 to file an amended Plan of Adjustment or at the very least a “term sheet” that explains the terms that the Plan of Adjustment will have.  We fully expect to meet this deadline. We think the amended plan of adjustment will be a realistic proposal that will be sustainable for Puerto Rico and will open a path to recovery and prosperity.