Puerto Rico Goes to Court for Record Restructuring: What's Ahead

(Bloomberg) -- After largely fruitless negotiations, Puerto Rico turned to court to reduce its $122 billion debt to bondholders and retired employees by using a specially tailored federal law. Because territories, like states, can't file under the Chapter 9 municipal bankruptcy provisions of the U.S. code, a procedure was created just for the distressed Caribbean island under emergency legislation last year.

Here's what's happened so far and what to expect:

• Puerto Rico's federal oversight board filed a case in U.S. district court. The action renews a hold on lawsuits, which lapsed on May 1, sheltering the government from adverse legal rulings.
• The government will continue negotiating with bondholders in an effort to reach an out of court settlement. It won't seek any immediate help from the court or file any motions that would require a quick court hearing, said Martin J. Bienenstock, head of the bankruptcy group at Proskauer Rose LLP in New York and an attorney in the case. Typically, a bankrupt government would be in front of a judge within days of filing in order to preview its argument for slashing debt and to win the court's blessing to get the case started.
• The Puerto Rico law, known as Promesa, will give the U.S. territory many of the tools that cities and counties have under Chapter 9. By allowing for the debt to be legally dismissed, the provision was intended to give Puerto Rico greater bargaining power with creditors.
• Puerto Rico will put together a debt-cutting proposal, known as a Title III plan of adjustment, that targets bondholders and a $48 billion pension liability.
• A judge must approve the debt-cutting plan after creditors have a chance to challenge the proposal.
• Creditors can ask the judge to dismiss the filing, forcing Puerto Rico to put on evidence justifying the case.

The case is Financial Oversight and Management Board for Puerto Rico, 17-cv-01578, U.S. District Court, District of Puerto Rico (San Juan).

To contact the reporter on this story: Steven Church in Wilmington, Delaware at schurch3@bloomberg.net.

To contact the editors responsible for this story: Christopher DeReza at cdereza1@bloomberg.net, William Selway, Andrew Dunn