PROMESA provides two mechanisms to restructure PR’s debt, Title III, a bankruptcy like procedure and Title VI, a mechanism to formalize agreements negotiated between PR and its creditors. Moreover, the way PROMESA is written, Title VI negotiations are indispensable for eligibility to Title III.
Section 206(a)(1) of PROMESA requires that before the Board issues a restructuring certification (permission for Title III) it determine that “the entity has made good-faith efforts to reach a consensual restructuring with creditors” Hence, Title VI negotiations are imperative. What is the procedure for these negotiations? Who negotiates, the Board or the Government of PR? What happens if the parties reach an agreement? What happens if they don’t reach an agreement?
Title VI of PROMESA provides some of the framework for said negotiations. Sections 206(a) and 405(n) of PROMESA establish that the Puerto Rico Government, not the Board, will conduct these negotiations. That does not mean that the PR Government and the Board cannot coordinate negotiations efforts but the former, not the latter, conducts them. The Board, however, has made it clear to PR that only it can approve the agreements, as I will discuss shortly.
Title VI consists of two sections, to wit, 601 and 602. Section 602 simply excludes foreign and international law from Title VI, therefore, section 601 covers the negotiations process. Strangely enough, section 601 does not establish the manner or form of the negotiations but rather structures how bondholders are to vote for the proposed modifying qualifications (modifications of the bond debt).
Once PR and bondholders come to an agreement to modify the bond debt, the Board, PR or the bondholders may propose a Qualifying Modification to such debt. If the Board likes it, it will order voting on that Qualifying Modification and if it does not like it, there will be no chance to have it approved. Once approved by the Board, officials designated by the Governor will establish pools for the different issuers of bonds. For example, if the bonds issued by the Retirement Fund have differences in preferences, or a lien (as the First Circuit recognized to Altair on those bonds), these bonds have to be put in different pools. Once all outstanding bonds, meaning valid bonds that have not been paid (another reason why the Board will conduct its own audit of PR’s debt), have been accounted for and its owners identified, certain information has to be delivered to them. Section 601(f) establishes the following:
Before solicitation of acceptance or rejection of a Modification under subsection (h), the Issuer shall provide to the Calculation Agent, the Information Agent, and the Administrative Supervisor, the following information—
(1) a description of the Issuer’s economic and financial circumstances which are, in the Issuer’s opinion, relevant to the request for the proposed Qualifying Modification, a description of the Issuer’s existing debts, a description of the impact of the proposed Qualifying Modification on the territory’s or its territorial instrumentalities’ public debt;
(2) if the Issuer is seeking Modifications affecting any other Pools of Bonds of the Territory Government Issuer or its Authorized Territorial Instrumentalities, a description of such other Modifications;
(3) if a Fiscal Plan with respect to such Issuer has been certified, the applicable Fiscal Plan certified in accordance with section 201; and
(4) such other information as may be required under applicable securities laws.
As stated above, once this information is delivered to the bondholders, they will vote and if “the affirmative vote of the holders of the right to vote at least two-thirds of the Outstanding Principal amount of the Outstanding Bonds in each Pool that have voted to approve or reject the Qualifying Modification, provided that holders of the right to vote not less than a majority of the aggregate Outstanding Principal amount of all the Outstanding Bonds in each Pool have voted to approve the Qualifying Modification” the modification will be approved. Section 601(j) of PROMESA.
If the Qualifying Modification is approved by the vote of the bondholders, then the agreement is taken to the US Federal District Court for the District of Puerto Rico for the entry of an order that the requirements of Section 601 have been satisfied. Once this order is entered, the Modifying Qualification is binding on all bondholders but this may be questioned in the US Federal District Court for the District of Puerto Rico due to the unlawful application of Section 601 or that in the judgment of the Court it is “manifestly inconsistent” with Section 601.
Undoubtedly agreements will be reached between some issuers and some bondholders, especially with those with weaker claims, to wit, PFC and GDB, the latter which its bondholders had already accepted 53% haircut. In others, such as GO’s and COFINA, it is likely that a Title III filing will ensue, especially if a quick resolution of that controversy is not made by Court resolution. And those filings will make Detroit seem a walk in the park.