Today’s U.S. Supreme Court decision in Commonwealth of Puerto Rico v. Franklin California Tax-Free Trustputs an end to one of Puerto Rico’s multi-pronged efforts to deleverage itself.

A few thoughts on Tuesday’s oral arguments before the U.S. Supreme Court in the litigation over whether Puerto Rico’s Public Corporations Debt Enforcement and Recovery Act, an insolvency statute for certain of its government instrumentalities, is void, as the lower federal courts held, under Section 903 of the U.S. Bankruptcy Code:

It is said that muddy water is best cleared by leaving it be.  The Supreme Court’s December 4 decision to review the legality of Puerto Rico’s local bankruptcy law, the Recovery Act, despite a well-reasoned First Circuit Court of Appeals opinion affirming the U.S. District Court in San Juan’s decision voiding the Recovery Act on the grounds that it conflicts with Section 903 of the U.S. Bankruptcy Code, suggests, at a minimum, that at least four of the Justices deemed the questions raised too interesting to let the First Circuit have the last word.

A few reactions to today’s oral arguments before the U.S. Court of Appeals for the First Circuit regarding the validity of Puerto Rico’s Recovery Act:

At the end of “The Candidate”, Robert Redford’s title character, having won, famously asks, “What do we do now?”

A similar question can be asked now that the federal district court in Puerto Rico has struck down the Puerto Rico Public Corporation Debt Enforcement and Recovery Act.

On February 6, 2015, Judge Francisco Besosa of the U.S. District Court for the District of Puerto Rico held that the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”) is expressly preempted by section 903 of the Bankruptcy Code and is therefore unconstitutional.

“Puerto Rico’s Recovery Act is barred by § 903(1) … of the Bankruptcy Code,” held the U.S. Supreme Court on June 13, 2016. Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust, 2016 WL 3221517, *11 (U.S. June 13, 2016) (5-2). Affirming the First Circuit, the court reasoned that Code § 903(i) “preempts state bankruptcy laws [enabling] insolvent municipalities to restructure their debts over the objections of creditors [and] instead requires municipalities to restructure [their] debts under Chapter 9 of the Code.” Id., at *2.

The Federal Housing Finance Agency (FHFA) has proposed new rules to "codify the terms of conservatorship and receivership operations for Fannie Mae, Freddie Mac and the Federal Home Loan Banks," as required by the Housing and Economic Recovery Act of 2008.

Recent declines in the trading prices of many companies' debt securities has created opportunities for those companies to reacquire a portion or all of that debt at substantial discounts through open market repurchases, privately negotiated transactions and tender offers. In some cases, the opportunities for discounted repurchases come to companies directly from investors seeking to sell the debt back in order to meet their own cash needs or otherwise obtain liquidity for thinly-traded securities.

Puerto Rico v. Franklin CA Tax-Free Trust, No. 15-233
Acosta-Febo v. Franklin CA Tax-Free Trust, No. 15-255