Cofina law passes legislative muster despite criticism
SAN JUAN – Despite minority lawmakers’ opposition, the Puerto Rico Senate passed Thursday House Bill 1837, which would amend the 2006 Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) charter law, to enable the restructuring of $16 billion in debt, under the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa).
Senate President Thomas Rivera Schatz argued in favor of the bill’s passage so creditors can exchange their bonds for new ones. Under the Cofina deal, senior bondholders will get 93 percent of the value of the original bonds and junior bondholders about 55 percent. U.S. District Court Judge Laura Taylor Swain will evaluate the restructuring agreement which will pave the way for debt adjustment plan in January.
“Pursuant to the Promesa law, in the discussion of the notorious, legendary and cursed debt some understandings are achieved and those agreements would produce $17 billion in savings for the Puerto Rican people,” Rivera Schatz said. “An agreement, where the immense majority of those creditors, and there are of all sizes and characteristics, are Puerto Rican residents and good people who bet on Puerto Rico. So we would have a savings of $17 billion in debt,” he reiterated.
Opponents of the bill noted that payments on restructured bonds rise over time, while Puerto Rico’s capacity to pay may diminish. Puerto Rico will pay back some $9.6 billion in principal but those payments will be offset; however, after 40 years, it will start paying a second bond, which is a capital appreciation bond (CAB) that may grow over time. According to the deal, Puerto Rico will still owe $14.2 billion on the CAB bonds that start in 2044.
“The question I would like someone to answer me here is if someone has a better alternative than this. Does anyone have any proposal that represents greater savings to the people of Puerto Rico?” Rivera Schatz asked.
During a recent interview with Caribbean Business, Rafael Rojo, of the Bonistas del Patio bondholder group, said a majority of the local Cofina bondholders support the deal because, although not perfect, it is better than the alternative of long-term litigation, which is something local bondholders, who are mostly retirees, cannot afford.
He stressed the importance of moving forward with debt restructuring because, as time goes by, local capital falls 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 this year, stood at about $9.5 billion. Most of the debt has been purchased by hedge funds, which in the long run will be able to influence debt restructurings.
“Local capital is being eroded and that is a big concern,” he stressed.
In a release, the Financial Oversight and Management Board for Puerto Rico welcomed passage of the legislation to support the plan of adjustment filed for Cofina.
“The legislation supports the Plan of Adjustment filed in the Title III Court on October 19 covering all of the $17.6 billion in COFINA debt, which represents 24% of Puerto Rico’s total bonded debt. The COFINA deal provides for more than a 32% reduction in COFINA debt, gives Puerto Rico approximately $17.5 billion in debt service savings, and enables local retail bondholders in Puerto Rico to receive a significant recovery,” the board wrote.
“We appreciate the commitment of the Legislature to continue supporting the orderly process of restructuring Puerto Rico’s unsustainable debt,” said Natalie Jaresko, executive director of the board. “The approval of this legislation advances the objectives outlined in PROMESA to regain access to capital markets and direct the Island towards an economic recovery. There is a lot of work ahead to achieve the dynamic and prosperous economy that Puerto Ricans deserve, but the dialogue with leaders of the Legislative Assembly is encouraging and we look forward to the continuation of our collaborative efforts.”
In a statement, the executive director of Puerto Rico’s Fiscal Agency & Financial Advisory Authority and president of the Government Development Bank, Christian Sobrino Vega, said that when “Governor Ricardo Rosselló Nevares enacts this measure into law, we will reduce the COFINA debt by approximately 34 percent and achieve estimated savings of over $435 million per year. These recurring funds that are not currently available to the People of Puerto Rico may be invested in works, essential services and compliance with other obligations such as the payment of pensions under Act 106-2017.”