Collective Action Clauses as a Solution to Holdouts in Puerto Rico’s Unique Debt Crisis: Lessons Learned from Argentina

Sumer B. Marquette | January 1, 2018

On June 30, 2016, in a controversial and bipartisan effort, the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) was signed into law to address the Commonwealth of Puerto Rico’s fiscal crisis. At the time, Puerto Rico’s government and its agencies had $72 billion in debt. However, Puerto Rico’s status as a U.S. territory disqualified the island from filing for court-arranged bankruptcy under the U.S. Bankruptcy Code and from seeking emergency assistance from the International Monetary Fund. As a result, PROMESA was enacted to create a structure for exercising federal oversight over the fiscal affairs of the territory by establishing an Oversight Board, a process for restructuring debt, and expedited procedures for approving critical infrastructure projects. This Note focuses on PROMESA’s Title VI retroactive inclusion of collective action clauses (CACs). Following the landmark decision in NML Capital Ltd. v. Republic of Argentina, CACs gained widespread appeal because they effectively safeguard against a perverse holdout incentive in the restructuring process. CACs expedite the restructuring process by allowing a supermajority of bondholders to agree to a debt restructuring that is legally binding on all bondholders. This Note concludes that Title VI’s inclusion of CACs is a normatively desirable result. When applied to the Puerto Rican debt crisis, CACs will likely mitigate the risk of holdouts and incentivize vulture funds to come to the bargaining table.