Wednesday, August 15, 2018

Puerto Rico fiscal board, gov: Deal with Cofina bondholders reached

By on August 8, 2018

SAN JUAN – In separate releases, Puerto Rico’s Financial Oversight and Management Board and governor both announced that the board–as representative of the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) in the bankruptcy-like process under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa)–the government and a number of bondholders reached a deal to restructure the instrumentality’s debt.

The “agreement in principle” reached with senior and junior bondholders and monoline insurers includes new Cofina securities, under “terms that are aligned with the fiscal reality of Puerto Rico,” according to the release issued by the office of Gov. Ricardo Rosselló.

The deal provides for more than a 32% reduction in Cofina debt, providing Puerto Rico about $17.5 billion in future debt-service payments and provides terms and conditions for restructuring the government-owned corporation’s debt.

It also “avoids additional costly and time consuming litigation, enables local retail bondholders in Puerto Rico to receive a significant recovery, and provides flexibility to the Commonwealth in managing future debt refinancing, while avoiding the liquidity based borrowings that contributed to the current crisis,” the board said.

The board’s proposed new Cofina securities “honor all property terms of the Settlement in Principle Agreement. The 53.65% Pledged Sales Tax Base Amount cash flow through and including 2058 (40 years) is fully allocated to the new Cofina bonds. All pre fiscal year 2019 Bank of New York Mellon cash is allocated to Cofina and subsequent deposits are split according to the settlement in principle percentage splits.

“All current Cofina holders receive new closed Senior Lien Bond secured by the 5.50% pledged sales and use tax. No parity debt may be issued other than refinancing bonds that produce debt service savings in each year for Cofina,” reads the document with the terms presented to the creditors.

It also says that the board “seeks to create long-term market access for the Commonwealth with an expanded subordinate lien.”

The agreement in principle is the product of a mediation process ordered by Judge Laura Taylor Swain and led by Judge Barbara Houser and her team of mediating judges.

A settlement between Cofina bondholders and the commonwealth of Puerto Rico in the dispute over ownership of 5.5 percent in sales & use tax (IVU by its Spanish acronym) revenues was recently achieved.

In the board’s release, Executive Director Natalie Jaresko wrote that its “objective has been to achieve a debt restructuring agreement with all COFINA parties consistent with the agreement in principle reached by the agents for the COFINA and Commonwealth, the terms of which were announced on June 7, 2018, and we believe this agreement has honored that goal.

After Title III bankruptcy proceedings began, the Financial Oversight & Management Board (FOMB) delegated two agents to the negotiations process to settle the dispute between the commonwealth and Cofina bondholders over ownership of sales & use tax revenues because the board was representing both parties in the bankruptcy.

The court agreed with the proposed protocol to settle the dispute over the 5.5 percent sales & use tax. The designated Cofina agent is Bettina Whyte and the commonwealth agent is Luc Despins, who represents the Unsecured Creditors Committee (UCC) in Title III proceedings, of which GO bondholders are members.

Settling the dispute over ownership of the sales & use tax was an important step to determine the distribution of assets as part of the Title III bankruptcy case filed under Promesa and is the matter that is holding up debt adjustments, say observers who see a deal as a move that would open further negotiations among other creditor constituencies.

The fiscal board meanwhile said it expects the deal to lead to a consensual plan of adjustment for Cofina and “represents a significant milestone in resolving Puerto Rico’s debt crisis.”

In a statement, the Cofina Senior Bondholders Coalition said: “This agreement between the Oversight Board and a substantial number of COFINA senior and subordinate creditors marks a major milestone for Puerto Rico on its road to recovery. The terms lay the groundwork for future capital markets access, equitable recoveries and the resumption of restructured cash interest for all bondholders, including a large cross-section of local retirees and individuals. Importantly, the deal also reduces Puerto Rico’s debt by approximately $7 billion, preserves access to low-cost securitizations and increases the Commonwealth’s FY2019 sales tax revenue by more than $360 million.

“Reaching an agreement that is supported by the Oversight Board, the Government of Puerto Rico and other major stakeholders also validates what has been a multi-year commitment of considerable resources and time by all parties. In addition to consistently advocating for consensual restructuring agreements, our group actively supported the passage of the Puerto Rico Oversight, Management, and Economic Stability Act and helped develop the dispute resolution protocol for COFINA’s Title III case. We now look forward to working with all parties to finalize a Plan of Adjustment that can be confirmed by year’s end.”

Christian Sobrino, the executive director of the Puerto Rico Fiscal Agency and Financial Advisory Authority (AAFAF by its Spanish acronym) said the agreement will provide the government “access to $425 million annually, on average, for the next 40 years.”

Rosselló said that “since the electoral campaign, my position has been that the debt of Puerto Rico has to be reduced to terms that we can pay, in face of the fiscal crisis of the Island due to mistaken decisions of the past. The public policy of my Administration has always been to reach consensual agreements with our creditors that do not affect the services that the Government provides to the most vulnerable.

“This agreement represents a significant step in restructuring Puerto Rico’s debt and reaffirms once again the credibility of our efforts. It joins the agreements that we have already reached with the bondholders of the Government Development Bank and those of the Puerto Rico Electric Power Authority. Moreover, these agreements are an important step to recover access to capital markets.”

A copy of the final presentation of terms delivered to creditors in mediation can be seen here.

–Eva Lloréns contributed to this report.

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