Saturday, September 26, 2020

Cofina Senior Bondholders Coalition Discloses Recovery Terms Discussed with Subordinate Bondholders

By on June 29, 2018


SAN JUAN – The complexity of negotiations underpinning Puerto Rico’s debt crisis, epitomized by the “my credit is better than your credit” of the Cofina-General Obligations dispute, has seen yet one more move as the representatives of the Cofina Senior bondholders issued a statement signaling progress in talks between Seniors and Subs in their priority tree.

A release issued by the Cofina Senior Bondholders Coalition, which represents the largest group of creditors holding bonds issued by the Puerto Rico Sales Tax Financing Corp. (Cofina), made public their latest efforts to strike a deal on the Cofina side of an equation that has yet to bring general obligation (GO) bondholders back into the fold.

While GO and Cofina creditors struck a so-called “creditors deal” in May to settle their dispute, that agreement was rejected by the island’s Financial Oversight and Management Board, contending it was too onerous. Since then, agents representing the commonwealth and Cofina have been working on a settlement to their dispute, which is essential to be able to move forward a debt adjustment settlement in the Title III bankruptcy process under the Promesa federal law.

Part of the process also includes negotiations for an Intra Cofina bondholders deal.

As part of that negotiation, Cofina senior bondholders said in a statement that its group, which in the aggregate holds more than $4 billion in senior and subordinate bonds, is committed to achieving a “confirmable plan of adjustment consistent with the court-appointed Agents’ agreement that will restart payments for Cofina bondholders and restore Puerto Rico’s access to the capital markets in a timely manner.

“Members of our group have been participating in active discussions with major holders of both senior and subordinate bonds in order to forge an acceptable intra-Cofina compromise. We seek a compromise that respects the relative priorities under the Bond Resolution while permitting Cofina subordinate bondholders to immediately resume receiving coupon payments through new bonds that have the same relative rights and priorities as the new bonds received by Cofina senior bondholders.

“If achievable, this outcome will be extremely beneficial for on-island and mainland holders that relied on Cofina for safety and income. The sooner a deal can be reached among COFINA’s stakeholders to present to the Financial Oversight and Management Board, the sooner the Commonwealth can also benefit from this cost-saving debt restructuring and accelerate its economic recovery.”

The bondholders revealed details of the “Intra-COFINA Allocation Proposal” discussed among members of the Cofina Senior Bondholders Coalition and major Cofina subordinate bondholders on June 18 for the proposed distribution of cash and new Cofina bonds that could be made under a plan of adjustment but noted that no discussions have yet been had with the fiscal oversight board about any such plan. No plan of adjustment can be filed by any party other than the board.

Following a discussion of the June 18 proposal, each side shared oral counter offers, but no agreement has been reached. Representatives of the Bonistas del Patio bondholders participated in the discussions, but did not join in any offers.

Oral counteroffer from subordinate bondholders

GoldenTree Asset Management, OppenheimerFunds, Goldman Sachs Asset Management, UBS Family of Funds, and First Puerto Rico Family of Funds counter-proposed:

  • 5% tax-exempt interest rate for new Cofina bonds
  • The cash held at Bank of New York Mellon would be paid out as post-petition tax-exempt interest (approximately two-thirds to subordinate bondholders, and one-third to senior bondholders)
  • Senior and subordinate bondholders would receive the same new bonds in different ratios
    • Pro forma future cash flows would be split 55% for senior bondholders and 45% to subordinate bondholders
  • The new bonds would not be callable
  • Bondholders would bear their own restructuring costs
  • Senior bondholders would receive new bonds equal to 90% of the pre-petition claim, subordinate bondholders would receive new bonds equal to 62% of the pre-petition claim
  • Cofina bondholders would receive a deficiency note from the Commonwealth of Puerto Rico to recoup losses sustained by Cofina bondholders contingent on the future financial performance of the Commonwealth, on terms to be negotiated with the Financial Management and Oversight Board

Oral counteroffer from senior bondholders

The Cofina Senior Bondholders Coalition (excluding GoldenTree Asset Management, which participated as a subordinate bondholder), with the support of National Public Finance Corp., and Ambac Assurance Corp. counter-proposed:

  • 5.375% tax-exempt interest rate for new Cofina bonds
  • The cash at Bank of New York Mellon would be distributed ratably among senior and subordinate bondholders
  • Senior bondholders would receive new bonds equal to 100% of the prepetition claim, which would equate to 92.8% on the post-petition claim as of September 30, 2018
    • New Cofina bonds would be subjected to a market test based on the yield to maturity being between 5% and 5.5%
    • Senior bondholders will work in good faith to structure a fair market test so as to ensure the actual recovery does not exceed 100% of the prepetition claim
  • Subordinate bondholders would receive the identical bonds as seniors in an amount equal to 45.7% of the prepetition claim
  • All bondholders would use their best efforts to achieve full call protection
  • COFINA bonds would remain non-recourse to the Commonwealth and there would be no deficiency note to cover COFINA bondholder losses

“No agreement was reached among all of the foregoing parties, and no further counteroffers were made between the senior and subordinate groups. The Cofina Senior Bondholders Coalition remains in confidential discussions pursuant to the mediation procedures entered in COFINA’s Title III case with Ambac Assurance Corp., National Public Finance Corp., GoldenTree Asset Management, and representatives of the Bonistas del Patio to try and achieve an intra-COFINA agreement that could be presented to the Financial Oversight and Management Board consistent with the timetable envisioned by the Agents’ settlement in principle,” they said.

In a recent interview with Caribbean Business, sources said that in the creditors’ agreement reached in May, there was no agreement struck. However, terms of that deal show otherwise. A source said at the time that “the deal includes a significant number of Cofina bondholders—including seniors, subs and the hedge funds, and a significant number of general obligation bondholders, which also includes all of the hedge funds,” and that in essence they were going to use Cofina revenue “to pay GOs a portion, Cofina seniors a portion and Cofina Subs a portion.”

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