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‘Bonistas’ Tout Cofina Deal Impact on Local Capital

By on October 22, 2018

Editor’s note: The following report was first published in the Oct. 18-24, 2018, issue of Caribbean Business.

The U.S. District Court generally receives correspondence from interested individuals impacted by the island’s bankruptcy case. While Judge Laura Taylor Swain says she cannot respond to each person who has expressed their thoughts and concerns, she “is deeply mindful of the impact that the fiscal crisis has on lives, institutions and expectations, and of the importance of the issues that are raised.”

The most recent letters from September and October are generally from junior Cofina bondholders expressing concern about the “unfairness” of the recent deal to restructure the Puerto Rico Sales Tax Financing Corp.’s (Cofina) $17 billon debt. Through the Cofina deal, bondholders will exchange their Cofina bonds for new bonds. Senior Cofina bondholders will recover 93 percent of their holdings while junior bondholders will get about 56 percent.

Rafael Rojo, head of Bonistas del Patio, said a majority of local Cofina bondholders support the deal because, although it is not perfect, it is better than the alternative of long-term litigation, which is something local bondholders, who are mostly retirees, cannot afford to do. He stressed the importance of moving forward with debt restructuring because, as time goes by, local capital is falling into the hands of outsiders or hedge funds as local investors desperately sell their Puerto Rico investments. While in 2012, some $25 billion in debt was held locally, that number, as of June 2018, is about $9.5 billion. Most of the debt has been purchased by hedge funds, which in the long run will be able to then influence debt restructurings. “Local capital is being eroded and that is a big concern,” he said.

Not everyone agrees. Seema Balwada, a subordinate Cofina bondholder, complained in a letter to Swain that individuals like him are facing a “cram down” because they were unrepresented in the mediations and were excluded from certain benefits contained in the preliminary deal.

“Cofina retail investors unrepresented in the mediation are facing a cram down by crafty Wall Street manipulators and an untrustworthy Commonwealth. These “easy target” subordinate bondholders have been excluded from a $332 million distribution to mediating participants and a $619 million distribution to senior bondholders, both [of which] are taken from the bondholders’ trustee-held funds. Unorganized and unrepresented individual bondholders are not included in any distribution of trustee-held funds,” he said.

He accused mediation team members of advantageously purchasing more than $1.1 billion in Cofina subordinate bonds using information that had not been disclosed, which is a move that will allow them to obtain a majority in decisions and influence the vote in favor of the Cofina deal. “Apparently, after manipulating the Cofina settlement and suspicious trading on material non-public information of the confidential court-led mediation, the fine print of the [Plan Support Agreement (PSA)] says the ‘PSA consummation cost parties’ will be rewarded, and senior bondholders will receive $619 million in trustee-held funds. It is hard to believe the extent of ‘taking’ from the retail subordinate bondholders not represented in the court-led mediation. Cofina subordinate bondholders, whether [Puerto Rico] islanders, retirees or households, should not be forced to accept more than a 40 percent haircut, let alone pay manipulating mediating teams for running roughshod over assets that don’t belong to the mediating institutions, and be excluded from the distribution of trustee-held funds,” he said.

Stephen T. Mangiaracina, another junior bondholder, wrote several letters to Swain. He said he does not understand why Cofina filed for bankruptcy because it was doing well financially. In addition, because Cofina’s bankruptcy petition did not show the entity was in default, he asked the court to refer the matter to the Justice Department.

“The issues presented by the filing are ones of criminality. No default is claimed [nor is] an inability to pay on the two claims listed. One is a specious credit SWAP by Lehman Brothers Holdings Inc. and the other by KPMG LLC for auditing fees,” Mangiaracina said. “The boxes to indicate whether the claims are contingent, unliquidated or disputed are left blank. At the time of the filing, Cofina had been in existence for about 11 years and, upon information and belief, never filed for bankruptcy protection upon receiving a bill,” he said.

Quoting a column by Financial Oversight & Management Board (FOMB) member David Skeel, Mangiaracina said the interests of the FOMB, which is to restructure the island’s debt, go against the interests of sales-tax bondholders.

“Mr. Skeel gives no mention of the “little people” who would be hurt if the Oversight Board could wrongfully take some of their property. Cofina junior bondholders are owned by retirees who are residents of Puerto Rico and elsewhere throughout the world. The income from these bonds is their pension. According to Mr. Skeel’s callous view, anything goes as long as every constituency bears some of the sacrifice to restructure Puerto Rico’s debt,” he said.

He said the FOMB has skin in the game because its mission is to pull in as much money as it can for the Commonwealth. “[The board] can turn Cofina bondholders against each other. Here the victims are the retail junior bondholders. Deals were cut with insurance carriers and their insured. Parties agreed not to sell their bonds to assure a successful vote down the road. The retail junior bondholders, whose bonds are not part of an institution’s portfolio (which includes both senior and junior), get sold out. Cofina will continue to survive and the parties’ agreement will settle the motion. If this is not a criminal enterprise, what is?” he asked.

He also insisted that before doing the restructuring, the court should have decided first whether Cofina was constitutional because bondholders then get their money back. That issue has not been decided.

“If Cofina is found to be constitutionally formed, then bondholders get back interest due, future interest until maturity of the bonds and then payment of their face value by Cofina. Yet, even a decision by this court holding that Cofina was unconstitutionally formed would be better than a settlement that would wrongfully take my property and deny me the due process that comes with a decision and order,” he said.

Rojo noted that most local bondholders, those who have purchased Cofina bonds, support the agreement because they are growing desperate about not collecting much needed money. They do not want to spend years in litigation because they cannot afford it. “Now, they have the alternative of a new bond that will allow them to collect interest,” he said. “We want to close this [process] and focus on improving the economy.”

While Rojo agreed that the process is not fair, he said the Puerto Rico Oversight, Management & Economic Stability Act (known as Promesa) changed everything, allowing the island to file for bankruptcy. He clarified that Cofina had to file for bankruptcy because there were questions about its legality. General-Obligation bondholders argued that money from the sales & use tax (IVU by its Spanish acronym) should be used to pay them. The issue was never decided, but Rojo said “those who are willing to continue to litigate have that right, but local bondholders do not want to do that.”

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