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GO Bondholders Call Upon Fiscal Board to Claw Back Cofina Funds

By on January 10, 2017

SAN JUAN – The Ad Hoc Group of General Obligations Bondholders reiterated Tuesday that the structure of the Puerto Rico Sales Tax Financing Corp., known as Cofina, is invalid and urged the Financial Oversight and Management Board to claw back the funds to pay general obligation (GO) bonds.

“Rather than bestowing inexplicable favoritism on Cofina’s debt, the Commonwealth should put an immediate end to the diversion of tens of billions of its SUT [sales and use tax, or IVU by its Spanish acronym] revenues to Cofina, and the Oversight Board should immediately exercise its statutory right to claw back the funds paid to Cofina since Promesa was enacted. Nothing else the Commonwealth or the Board can do would accomplish as much to restore Puerto Rico to fiscal health,” the GO bondholders said.

Their criticism comes days after Gov. Ricardo Roselló and the oversight board said they will try to renegotiate the terms of debt payments instead of seeking debt restructuring under Promesa.

Cofina logo / file

Cofina logo / file

“Cofina is a conduit through which billions of dollars were borrowed on the back of the Commonwealth’s core revenues. Cofina’s only source of funds to pay its $17 billion of bonds (and growing) is sales and use tax [IVU] revenues illicitly assigned by the Commonwealth. The most powerful path for solving the Commonwealth’s fiscal crisis is to recognize the invalidity of that assignment and return those revenues to the Commonwealth. Doing so would immediately increase the General Fund by over $700 million in the current fiscal year alone and by more than $50 billion over the remaining life of Cofina’s existing bonds,” the group said in a statement.

Inexplicably, the GO bondholders say, the commonwealth has done precisely the opposite, bestowing “singular favoritism” on Cofina debt holders by “paying them in full,” and opposing the GO group’s legal challenge to the Cofina debt on procedural grounds. The oversight board has likewise sought, also on procedural grounds, to prevent that challenge from moving forward.

The GO bondholders were referring to the federal lawsuit known as Lex Claims, in which they are seeking to have a claim over IVU revenue, contending that they have a priority lien established by the commonwealth’s Constitution.

“Cofina is an illicit artifice. It is an entity whose sole purpose has been to borrow money with the backing of SUT revenues diverted from the Commonwealth. This gimmick was set up in 2007 to end-run several core, interlocking protections against fiscal irresponsibility enshrined in Puerto Rico’s Constitution for the protection of Constitutional Debt (and in turn, the people of Puerto Rico). These protections include, among other things, the debt-service limit, the maturity limit, and the debt-service priority and first claim against all available resources,” the GO bondholders said.

The GO bondholders’ statement lists reasons for the illegality of Cofina. First, they said the Constitution prohibits the commonwealth from borrowing money if the resulting debt service in any future year would exceed a “prescribed, modest portion of the Commonwealth’s revenues,” essentially 15% of the recent average revenues at the time of borrowing. “Starting with its very first borrowing in 2007, Cofina issued debt that would have offended this limit if it had been issued by the Commonwealth,” they charged.

Second, they said, the Constitution “generally prohibits the Commonwealth from borrowing money with a maturity exceeding 30 years,” adding that Cofina-issued debt would have “offended this Constitutional protection if it had been issued by the Commonwealth.”

Third, the Constitution requires that all of the commonwealth’s resources be available first to service its own constitutionally protected debt or the GO bondholders to ensure Puerto Rico had access to capital markets.

“If the COFINA structure were legal, it would render useless all three of these constitutional provisions. In fact, if taken to its logical extreme, the Commonwealth could attempt through mere legislation to divert an unlimited amount of its tax collections from any source to Cofina-like structures. Such a structure is a transparent end-run around the explicit protections for Constitutional Debt, a result totally at odds with Puerto Rico’s Constitution,” the bondholders said.

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