On June 28, 2014, Puerto Rico’s Gov. Alejandro Garcia Padilla signed into law the Puerto Rico Corporations Debt Enforcement & Recovery Act (the Act), which permits certain public corporations in Puerto Rico to restructure their debt obligations. Within 24 hours, mutual funds investing in Puerto Rico’s Power Revenue Bonds (the PREPA Bonds) issued by the Puerto Rico Electric Power Authority (PREPA) challenged the constitutionality of the Act, while rating agencies downgraded PREPA Bonds, sparking numerous reports of PREPA’s imminent filing.
It is uncertain whether the Act will survive the constitutional challenge or how soon the Act will be invoked by Puerto Rico’s public corporations. What is clear is that despite claiming to be modeled on the U.S. Bankruptcy Code (the Code), the Act lacks some of the key protections that creditors have come to expect when dealing with the U.S. system.
