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Invitation to exchange Puerto Rico Cofina bonds issued

By on June 11, 2019

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For tax-exempt bonds less than 25 points lower than yield on those exchanged

SAN JUAN — The Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) has issued an “Invitation to Exchange Bonds and Consent to Amendments,” dated June 10, of certain holders of sales tax revenue bonds.

On Feb. 12, the debt adjustment plan for Cofina’s debt was approved by the U.S. District Court. Sometime after, Cofina issued about $12 billion in restructured bonds. The invitation only covers holders of Series A-2 and B-2 bonds, which total some $3.6 billion.

As part of the aforementioned deal, Cofina, Puerto Rico’s Fiscal Agency & Financial Advisory Authority and the island’s fiscal oversight board had agreed that if the Internal Revenue Service determined that the interest on the bonds was excludable from gross income for federal income tax purposes, Cofina would offer all bondholders the opportunity to exchange such bonds for Cofina tax-exempt bonds.

In May, the IRS informed the government of Puerto Rico that it will exempt the sales and use tax revenue bonds issued by Cofina, according to a notification published by the Financial Oversight and Management Board.

“The Invited Bonds were originally issued without an opinion relating to the status of interest for United States federal income tax purposes. The Invitation and supporting materials invite holders of Invited Bonds to exchange those bonds for bonds the interest on which is tax-exempt for U.S. federal income tax purposes, and with an interest rate that has been adjusted to reflect a yield that is no more than twenty-five (25) basis points lower than the yield on the Invited Bonds of the same series, subseries and maturity,” the notice issued Monday reads.

The IRS Closing Agreement, however, does not state that the so-called invited bonds are tax-exempt. Rather, it provides Cofina with the steps and allocations it can take to qualify the bonds as tax-exempt.

Bondholders are not required to exchange their invited bonds; however, if not exchanged and covered by the conclusion in the IRS Closing Agreement, these will be subject to federal income taxation, except with respect to Puerto Rico residents and corporations that meet certain requirements of the U.S. Internal Revenue Code.

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