Cofina debt adjustment plan running into problems, challenged

SAN JUAN – Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) bondholders who on Feb. 12 began the process of exchanging their bonds for new ones started noticing that their accounts did not add up to what they were promised under the debt adjustment plan.

For instance, Cate Long, who leads a research service for Puerto Rico bondholders, tweeted that a bondholder apparently got less than originally promised. A “subordinate current interest bond which should have had a recovery of 56 or $2,800 (56% of $5,000) Instead bondholder was given $1,086 between cash & one splinter bond. Useless,” she wrote.

That is just one of the problems with Cofina’s debt adjustment plan. Now, Cofina bondholders are moving forward with different court challenges against its debt adjustment plan as restructured bonds have begun to trade in the market.

Several labor unions and independent Rep. Manuel Natal announced that they had filed an appeal in the U.S. First Circuit Court of Appeals against the deal. Also, Elliot Asset Management, a Boston-based investment firm, said it was also going to challenge the adjustment plan, arguing it is unconstitutional.

James Sparks, principal at Elliot Asset Management, said Cofina’s debt adjustment plan, which was approved by the U.S. District Court on Feb. 5, has left junior Cofina bondholders with disproportionate losses while others are reaping benefits. He said the deal violates the constitutional contract clause that prohibits laws that retroactively go against contracts and the takings clause, which requires the government to pay just compensation for private property.

“No court can override the Constitution,” Sparks said when asked about clauses in the deal that prevent collateral challenges to it.

The restructuring of Cofina’s $17 billion debt, which went into effect Feb. 12, has two parts. In the first, commonwealth and Cofina bondholders settled their dispute over ownership of the sales & use tax (IVU by its Spanish acronym) by agreeing to divide the 5.5 percent portion of the 11.5 percent sales & use tax. From the 5.5 percent portion, Cofina will keep 53.6 percent and the commonwealth receives the rest.

Secondly, under the debt plan, Cofina bondholders were to exchange their current bonds for new bonds whose value was cut. While Cofina senior bondholders are slated to recover 93 percent of the value of their original bonds, junior bondholders only recover 53 percent.

The central argument of the proposed lawsuit is that junior Cofina bondholders were inadequately represented in the negotiations that led to the debt adjustment plan and, as a result, obtained unjust compensation for their investment.

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