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Cofina source says deal is more than agreement in principle

By on August 9, 2018

SAN JUAN – The latest agreement in principle among senior and subordinate Puerto Rico sales-tax-revenue bondholders and monoline insurers with the island’s government and Financial Oversight and Management Board is supported by a large percentage of the creditors so chances are it will suffer little change and will end up headed to court approval.

That is what a Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) bondholder who participated in the negotiation said. “In percentage terms, the agreement is supported by 70% of the senior bondholders, including monoliners, and 40% of the subordinate bondholders,” the source said.

As part of the deal, Cofina bondholders will exchange their current bonds for new ones, reducing Cofina’s debt by about 32% and providing Puerto Rico with about $17.5 billion in future debt-service payments, and provides terms and conditions for restructuring the government-owned corporation’s debt.   

Title VI of the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa) provides that bonds issued by Puerto Rico or an instrumentality can be modified and become a “qualified modification” binding on all bondholders in the applicable pool of bondholders if holders of at least twothirds of the pool’s principal amount who actually vote, and holders of at least 50% of the total principal amount outstanding in such pool vote, to approve the modification and that it is approved by the fiscal board.

“Given the percentage of creditors in agreement, I anticipate the agreement will stay as it is,” the source said, adding that the expectation is to have the agreement presented to the court by the end of the year.

Under the deal, the fiscal board’s proposed new Cofina securities honor all property terms of the “Settlement in Principle Agreement.” It calls for the 53.65% Pledged Sales Tax Base Amount (PSTBA) cash flow through and including 2058 (40 years) is fully allocated to the new Cofina bonds. All pre-Fiscal Year 2019 Bank of New York Mellon cash is allocated to Cofina and subsequent deposits are split according to the Settlement in Principle percentage split. All current Cofina holders receive new, closed Senior Lien Bond secured by the 5.5% pledged sales and use tax. No parity debt may be issued other than refinancing bonds that produce debt service savings in each year for Cofina.

In accordance with Promesa, the fiscal board also seeks to create long-term market access for the Commonwealth with an expanded subordinate lien.

The latest deal stems from a separate previous preliminary settlement negotiated by the agents representing Cofina and the Commonwealth, respectively, to distribute Cofina’s money.

Under the deal, Cofina senior bondholders would recuperate 93% of their investment while subordinate Cofina bondholders would recover 53.9%. Mediation parties who agreed to negotiate and sign a restructuring support agreement would receive consideration for their efforts based on their holdings as of Aug. 7. That consideration is 2%, which will be set aside in the form of bonds or cash.

A note on the proposed agreement, however, says that while senior lien bonds are designed to meet certain metrics, the fiscal board does not anticipate the bonds will receive investment-grade ratings at issuance.

The source, however, said the new Cofina bonds that may be issued next year for the bond exchange are “equal or better than the current ones in terms of collateral” and are designed to meet investment-grade criteria. The exchanged bonds represent more than $11 billion in new bonds. “Cofina’s debt is reduced by a third,” the source said. “The characteristics of the new bonds, which will not have a rating, are comparable to bonds that have reached Triple-A or Double-A ratings.”

The new Cofina bonds will not have any rights of acceleration of payments in the event of a default, according to the terms.

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