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Battle Between GOs and Cofina Bondholders Heats up

By on November 12, 2016

General obligation (GO) bondholders who are asking a federal judge to force Puerto Rico’s government to use funds from the Sales Tax Financing Corp. (Cofina by its Spanish acronym) to pay its GO debt, opposed Friday a request by Cofina bondholders to intervene in the claim.

The general obligations bondholders in the Lex Claims lawsuit charged that the request made by Cofina bondholders to intervene in the case should be denied because they contractually delegated any rights they may have had in the claim to the trustee of their bonds, Bank of New York Mellon. Lex Claims bondholders also noted that Cofina bondholders did not include a pleading with their petition and that their arguments in support of a stay of the claim are meritless.

Cofina logo / file

Cofina logo / file

Lex Claims bondholders sued the government in June  to stop it from transferring funds to pay for services instead of debt but the plaintiffs amended their complaint in early October to force Puerto Rico to use Cofina funds to pay its GO debt.

The GO bondholders contended that while governor declared a moratorium on the payment of their debt, it continues to divert millions to pay Cofina bonds even though GO’s have a first claim on the government’s available resources as established by the Puerto Rico Constitution. The government, on the other hand, says money from the sales and use tax that is used to pay Cofina bonds is not considered “available resources.”

Recently, Cofina senior bondholders sought to intervene in the case to protect their interests.

“Every day of delay means another day for the Cofina Bondholders to enjoy their unlawful privileged position, and it means further diversion of the Commonwealth’s available resources to fund payments on Cofina’s debt.  But that does not make the Cofina Bondholders’ intervention permissible,” Lex Claims said.

The plaintiffs said Cofina bondholders have failed to comply with the requirement of a federal procedure rule that states they must file “a pleading that sets out the claim or defense for which intervention is sought.”

Second, Lex Claims says intervention is inappropriate because the underlying bonds owned by the Cofina bondholders and the contractual agreements by which they were issued deny them any right to appear in the claim.

Read more: Lex Claims goes after Cofina Funds to pay GO

“Those documents establish clear limits on who may participate in litigation to protect the rights of holders of Cofina  bonds, and the Cofina Bondholders have not complied with those requirements here,” the document says.

Lex Claims bondholders say the only reason Cofina bondholders insist in intervening in the case is because they know that the diversion of SUT funds to Cofina is illegal.

“For all their false bravado, the Cofina bondholders want to stop this litigation in its tracks precisely because they know that the constitutional validity of the Commonwealth’s assignment of sales and use tax revenues to Cofina is, at the very least, an unsettled question with critical consequences for any negotiations toward a consensual solution to the Commonwealth’s financial situation,” the plaintiffs said, adding that it is up to the court to decide on its legality.

“Delaying that day of reckoning would serve only to enrich the Cofina bondholders and further delay accomplishment of Promesa’s objectives,” the plaintiffs said, referring to the restructuring of the island’s $69 billion debt.

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