Wednesday, June 19, 2019

Cofina debt adjustment plan slated to go into effect Tuesday

By on February 11, 2019

SAN JUAN – The congressionally established Financial Oversight and Management Board intends for the debt adjustment plan of the Puerto Rico Sales and Use Tax Financing Corp. (Cofina by its Spanish acronym) to be put into effect as early as Tuesday, Feb. 12, about a week after the U.S. District Court gave it the green light.

The Electronic Municipal Market Access (EMMA) system, which is operated by the Municipal Securities Rulemaking Board, stated there will be two Cofina issuances that were dated Feb. 12. The first is Class 2047, which has a maturity date of Aug. 1, 2047, and the second is Class 2054, with Aug. 1, 2054, as its maturity date.

According to the debt adjustment plan, which was affirmed Feb. 5, Cofina and Reorganized Cofina, as the case may be, are authorized to make distributions and issuances as required under the plan and to enter into any agreements and transactions.

Recently enacted bond legislation amended the existing Cofina legislation to establish an independent Cofina board, permit the sales tax, tax exemption, substitution of “new collateral and non-impairment provisions,” among other things, and grant other authorizations required to implement the transactions.

The island’s fiscal board, however, already said last week it was seeking to implement the debt adjustment plan as early as Feb. 12. The information is contained in an urgent request for approval of a settlement between Cofina and Goldman Sachs Bank arising from a swap agreement.

The dispute needed alternative handling, which was provided through the debt adjustment plan. On Feb. 7, days after the court entered an order confirming the plan, Cofina and Goldman Sachs Bank reached an agreement resolving the dispute. Specifically, they agreed the swap agreement will be deemed rejected, Goldman Sachs Bank shall be entitled to liquidate and apply the collateral in “partial satisfaction” of the claim, and Cofina will pay $11 million to the bank.

“Approval of the Stipulation and Order is a matter of extreme urgency. The Oversight Board intends for the Plan to go effective as early as February 12, 2019. If the Stipulation and Order is not approved by this Court prior to the Effective Date, Cofina will be forced to reserve approximately $20 million in Cofina Bonds and cash from the Senior Cofina Bond Distribution, an amount equal to approximately 93% of GS Bank’s asserted Claim in excess of the Collateral.

“Given the relative insignificance of such amount compared to the aggregate allowed amount of approximately $7.7 billion of Senior COFINA Bond Claims, it would be a logistical impossibility to redistribute any amount wrongfully reserved from the Senior COFINA Bond Distribution in the likely event that GS Bank’s Claim is disallowed in whole or in part,” the motion says. As a result, the board requested expedited handling of the request.

The restructuring of Cofina’s $17 billion debt 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. According to court documents, the split will result in the commonwealth receiving about $400 million a year from the sales & use tax over the next 40 years.

Secondly, under the debt plan, Cofina bondholders will exchange their current bonds for new bonds whose value is being cut. Cofina senior bondholders will recover 93 percent of the value of their original bonds and junior bondholders 53 percent.

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