Tuesday, October 26, 2021

Cofina Bondholders put Debt-relief Plan on Table, Await P.R. Gov’t Response

By on February 10, 2016

SAN JUAN – A group of Sales Tax Financing Corp. (Cofina by its Spanish acronym) bondholders are proposing to the Puerto Rico government a debt-restructuring plan that would provide liquidity and debt-relief to the commonwealth while respecting Cofina’s legal particularities.

The proposal, dated Feb. 4, is being presented by the Ad Hoc Group of Cofina Senior Bondholders — holding about $7.6 billion of the roughly $17 billion in Cofina debt — and was prepared by New York-based investment firm Miller Buckfire & Co. and California-based law firm Quinn Emanuel. A source told Caribbean Business that it was delivered last week to commonwealth advisers, but no response had been received from the administration as of this writing.

In all, the proposal would provide debt-service relief under Cofina during the next few years, although extending payments for a longer time. This way, Puerto Rico would save roughly $2 billion during the next four years, according to the ad hoc group, but no reduction to principal, or “haircut,” is contemplated. Under the commonwealth’s proposal, principal on the targeted debt, including Cofina, could face haircuts in the vicinity of 45%, according to estimates.

“The Ad Hoc Group is willing to assist the commonwealth to see its economy return to growth consistent with Cofina’s statutory and contractual rights,” the proposal reads, adding it would still accommodate the government’s most recent debt-restructuring offer to creditors“without endorsing its details, while respecting and affirming the Cofina securitization.”

Cofina’s roughly $17 billion debt is backed by a share of the island’s sales tax that goes directly to pay bondholders twice a year, with the remainder going to the commonwealth coffers. Through this mechanism, known as securitization, the pledged portion of the sales tax belongs to Cofina and not the commonwealth itself, serving as an added guarantee that helped in lowering financing costs at the time.

The Cofina bondholder group is calling for a “collaborative process,” whereby momentum could be created to achieve a consensual restructuring framework, as well as to avoid “cost, delay and uncertainty inherent in litigation,” the document reads.

Susheel Kirpalani, partner at Quinn Emanuel, told the Washington Post that the Cofina ad hoc group of bondholders he represents “can try to shape relief for the commonwealth that’s consistent with the commonwealth’s demands that doesn’t involve bankruptcy or coercing people or doing violence to the Cofina structure.”

The terms under the proposal include a reduction of the pledged portion of the sales tax from the current 2.75% to 0% during fiscal year 2017, which begins July 1, and would gradually increase until reaching 2.5% by fiscal 2021. What’s more, if no economic growth is achieved, the commonwealth would only need to pay $600 million annually to service its Cofina debt, beginning in fiscal 2021 and running until fiscal 2046.

Other aspects include easing up the commonwealth’s working capital through the suspension of “first payment priority” under Cofina, in a bid to eliminate the need for tax revenue anticipation notes, or TRANs, to operate during the first part of a fiscal year. Also, a “backstopped liquidity facility” is being created so eligible holders of Cofina subordinate debt can cash out or obtain current income if they decide to do so.

Terms under the ad hoc group’s proposal include:

― Reduction of pledged tax from current rate to 0.0% in fiscal year (FY) 2017, 1.25% in FY 2018 to FY 2019, 1.75% in FY 2020 and 2.50% thereafter;
― Reduction of pledged tax subject to a static floor of $600 million (Cofina’s allocation of Super Bond debt service subject to MFN [most-favored nation] below) starting in FY 2021 until Cofina Senior Lien Bonds are repaid;
― Revenues allocated to Cofina would be subject to MFN adjustment, should the sum of (x) debt service made by the Commonwealth on any public debt, including the Super Bond, plus (y) the allocation to Cofina, exceed $1.7 billion, following ongoing diligence and resolution with Commonwealth General Fund creditors;
― Normalized working capital through suspension of first payment priority waterfall to eliminate need for TRANs [tax revenue anticipation notes]; and
― Creation of a backstopped liquidity facility to cash out and/or provide current income to eligible Cofina Subordinate Bondowners electing to receive such treatment.


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