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By Andrew Scurria

Law360, New York (February 11, 2015, 2:21 PM ET) -- Puerto Rico's representative in
Congress expects that a bill making the commonwealth's public corporations eligible for
bankruptcy protection will generate no opposition given the apparent failure of its local
restructuring regime and the dire consequences of default, he told Law360.
Investors and lawmakers are scrambling to react after a judge struck down a commonwealth
law designed to let the commonwealth's heavily indebted public corporations right-size their
balance sheets. Unlike other U.S. municipal entities, public instrumentalities in Puerto Rico are
prohibited from invoking Chapter 9 bankruptcy to force creditors to accept restructurings.
The judge's decision marked a victory for holders of public corporation bonds, which feared the
local law's lack of creditor protections. But it also extinguished the only legal framework for
debt-laden state instrumentalities like the Puerto Rico Electric Power Authority to execute a
binding debt workout.
Congressman Pedro Pierluisi, the commonwealth's nonvoting delegate, has proposed a bill to
replace the so-called Recovery Act by ending the longstanding exclusion of its public
corporations from Chapter 9. In an interview, Pierluisi said the bill has won bipartisan support
since it was first introduced last year and could clear the House and Senate on an expedited
basis, possibly within months.
"It would be in the interests of all stakeholders for Puerto Rico to have access to Chapter 9,"
Pierluisi said. "When you're dealing with bond issues, you're dealing with thousands of
investors, and the only way to enforce any kind of deal or any kind of plan is in a court
process."
Lawrence Larose, a bankruptcy lawyer at Chadbourne & Parke LLP, called Pierluisi's reform "the
most direct and probably the most constitutionally defensible move."
The fate of the bill carries huge implications for PREPA creditors, which are negotiating to put
the utility back on a sustainable path while protecting multibillion-dollar debt positions.
Creditors have agreed not to call loan defaults on PREPA until March to give it the time to
fashion a workout.
In return, PREPA agreed not to avail itself of the Recovery Act during the closed-door talks. But
its creditors can terminate those forbearance agreements at any time and sue for the
appointment of a receiver. Even as low oil prices have lowered PREPA's operating costs, a
faltering liquidity position would incentivize bondholders to act quickly.
Puerto Rico's highway authority and sewer operator are likewise struggling with massive debt
problems, shrinking revenue bases and junk bond ratings. Lawmakers had pitched the
Recovery Act as a way to prevent creditors from exercising remedies in piecemeal fashion in
the event of a default or interfering with the government's provision of basic services.
"We don't have time, and we need to act with a sense of urgency," Pierluisi said. "Nobody

wants a default or a slew of collection actions against these entities that are very tied to our
economic well-being."
Passed hurriedly in June amid an acute fiscal emergency, the Recovery Act set up a
restructuring process that threatened creditors with harsh restructuring terms. Workout plans
need less creditor buy-in to become binding under the law, and secured revenue bonds are
granted none of their usual protections.
Investment firms holding a combined $2 billion in PREPA bonds challenged the quasibankruptcy regime immediately after its passage, claiming in a lawsuit that the commonwealth
had no business establishing a binding restructuring process when only Congress can create
bankruptcy law. U.S. District Judge Francisco Besosa agreed, issuing an opinion on Friday found
the Recovery Act unconstitutional.
Private entities in Puerto Rico can file for bankruptcy as can individual debtors. But lawmakers
felt that Congress itself, not the commonwealth, should address any issues of insolvency in
public corporations, according to Pierluisi, who researched the legislative history of the
37-year-old U.S. Bankruptcy Code when crafting his bill.
"The judgment then was: If any government entity ends up insolvent, we'll deal with that
ourselves," Pierluisi said. "Maybe that could be viewed as a sensible approach back then, but
knowing now the way Congress works and the issues Congress faces, it's not realistic at all to
expect Congress to deal with insolvency issues on a case-by-case basis with respect to Puerto
Rico."
Pierluisi wants the House Judiciary Committee to hold a hearing on his bill, the Puerto Rico
Chapter 9 Uniformity Act, "in the next couple of weeks." From there, he hopes to mark up the
bill without controversy and suspend the normal procedural rules to fast-track it through both
houses of Congress.
"Nobody's really reacting negatively because it would be hard to understand why," Pierluisi
said.
Karol Denniston, a restructuring lawyer with Squire Patton Boggs LLP, said that without a legal
framework to govern negotiations, public corporations and their creditors will find it harder to
organize around a prepackaged strategy or overcome recalcitrant holdouts. Chapter 9 speaks to
both those concerns it requires prospective debtors to negotiate before entering bankruptcy
and lets judges overrule objections to a plan.
"The challenge is that there's no overarching process that organizes that, and it's hard for
creditors to figure out how to react when it looks like chaos," Denniston said. "Right now in the
U.S., the best thing we have is Chapter 9, but it's not so much which process you prefer as the
need to have a process."
Whether PREPA's creditors will wait for Congress is another matter. Chief Restructuring Officer
Lisa Donahue of AlixPartners LLP has requested an extension of the current forbearance
agreements, which expire in March. With each day that PREPA's liquidity weakens, creditors
become more likely to walk away from the table, seek a receiver and recover what they can.
"That's a scorched-earth type of strategy," Pierluisi said. "When you do that, you're basically
hitting bottom, and you're probably endangering the viability of the entity itself, and that's not
good for anybody."
--Editing by Katherine Rautenberg and Christine Chun.
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