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Hedge Funds to Profit From Puerto Rico Debt Restructuring

By on October 12, 2018

Editor’s note: The following originally appeared in the Oct. 11-17, 2018, issue of Caribbean Business.

Despite battling in U.S. District Court to force Puerto Rico to pay a debt it could not pay, several hedge funds bought more of Puerto Rico’s debt over the past year and now are slated to profit from debt restructuring deals, according to stateside media.

Several hedge funds, according to the Intercept, have bought up Puerto Rico bonds after prices dropped in the year following Maria, while others saw their debt holdings grow.

GoldenTree Asset Management, a bondholder for the Puerto Rico Sales Tax Financing Corp. (known as Cofina), owned $587 million worth of Puerto Rico government bonds before the storm, according to a filing dated Aug. 18, 2017. In another filing almost exactly a year later, the company owned $1.5 billion in government bonds. Tilden Park Capital Management, another Cofina creditor, increased the value of its holdings by $370 million over a one-year period. General-obligation (GO) bondholders Aurelius Capital Management and Monarch Alternative Capital have also hiked their holdings from $39 million before the storm to $488 million, the Intercept reported.

“Due to complexities in the ways some bonds are valued, some hedge funds are reporting increases in bond holdings without actually purchasing more debt. Those bonds, called capital-appreciation bonds, have been referred to as Puerto Rico’s payday loans due to their predatory structure, in which interest is added back to the principal, which increases exponentially over time. In the cases of GoldenTree, Tilden Park, Monarch and Aurelius, the increases in reported holdings are so massive that they appear to be due to new purchases of debt,” the Intercept said.

The Cofina bondholders, the commonwealth and the Financial Oversight & Management Board recently reached an agreement to restructure Cofina’s $17 billion debt, which according to media reports, led to a rally in bond prices.

Under the agreement, senior Cofina bondholders will see a 93 percent recovery on the value of their bonds, and junior creditors will see a 56 percent payout. GO bondholders, despite fighting until the last minute, agreed to an amended version of the deal that now must go to Judge Laura Taylor Swain.

“Should the deal pass muster there, it would see the island return $33 billion to creditors on a principal of just $17.5 billion,” the Intercept said. Another publication, the nonprofit LittleSis, noted that GoldenTree and Tilden Park could make 100 percent to 150 percent profit on Cofina debt or about $200 million to $300 million.

Repayment of Cofina is pegged to the 11.5 percent sales & use tax, which under the restructuring cannot be changed in the upcoming years.

In related bankruptcy news, the Unsecured Creditors Committee (UCC) has yet again changed its membership. The U.S. trustee appointed Tradewinds Energy Barceloneta to the UCC. Puerto Rico Hospital Supply, Total Petroleum Puerto Rico Corp. and Peerless had resigned from the committee.

The UCC views the changes with “abundance of caution,” given Tradewinds Energy Barceloneta LLC’s recent addition. “Changes to the committee’s membership since the last Bankruptcy Rule 2019 statement filed by the [UCC] on May 9, 2018, have not resulted in material changes to the committee, both because the departure and/or addition of committee members over time has not materially changed the nature and total amount of claims represented by committee members, and the committee’s fiduciary obligations run to all unsecured creditors and are not dependent upon the composition of the [UCC] or the size or nature of a particular committee member’s claims,” the panel said.

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