Judge Swain continues to hear Cofina restructuring deal
SAN JUAN – U.S. District Court Judge Laura Taylor Swain will continue Thursday to hear arguments on the restructuring of the $17 billion debt of the Puerto Rico Sales and Use Tax Corp., known as Cofina for its acronym in Spanish.
The government-owned corporation’s restructuring is twofold. First, holders of general obligation bonds issued by the commonwealth and Cofina bondholders settled their dispute over ownership of the island’s sales and use tax when agreeing to divide the 5.5% portion of the 11.5% sales and use tax. From the 5.5% portion, Cofina will keep 53.6% and the commonwealth will take the rest. According to court documents, the split will result in the commonwealth receiving about $400 million from sales and use tax revenue each year over the next 40 years.
Secondly, under the debt plan, Cofina bondholders will exchange their current bonds for new ones whose value is being cut. Senior Cofina bondholders will recover 93% of the value of the original bonds, while junior bondholders recover 53%. The government says it will be able to obtain a 30% savings.
Part of Wednesday’s hearing was devoted to arguments about the settlement of the Commonwealth-Cofina dispute and another part to the bond exchange among Cofina bondholders. The judge took the arguments on the dispute under advisement but will finish hearing arguments Thursday on the rest of the debt-adjustment plan.
At the start of Wednesday’s hearing, Judge Swain said she was going to ensure the issues were fair and reasonable but that her decision was not going to be an easy one. She said she was aware of a massive protest against the deal taking place outside the courtroom on Chardon Avenue and of the about 30,0000 signatures against the Cofina deal posted on www.change.org.
During the morning, the parties discussed the so-called “9019 settlement,” consisting of the split of the 5.5% portion of the sales and use tax between the commonwealth and Cofina. No one opposed a statement filed by the executive director of Puerto Rico’s Financial Oversight and Management Board, Natalie Jaresko, in support of the split. Jaresko said ending the Cofina dispute would help avoid long and costly litigation in which the commonwealth would probably lose.
Brian Rosen, a lawyer from Proskauer-Rose, the firm that represents the fiscal oversight board, said there were very few objections to the Cofina-Commonwealth dispute’s settlement. He said the opposition had been generated by “five people working in concert with each other and junior bondholders.”
Most of the general objectors to Cofina’s debt-adjustment plan argued that debt service payments to Cofina would result in another default at a time when the island’s economy is at a standstill and the population is dwindling. Opponents also said the deal could result in cuts to commonwealth resources and would lead to austerity measures and pension cuts. Some objections came from junior bondholders, who stressed they were getting very little money in return for their original investment.
Rosen listed lawsuits against Cofina’s legality–some predating the start of Cofina’s bankruptcy-like process under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (Promesa)–by hedge funds and monoline bond insurers such as LexClaims and Ambac.
The fiscal board appointed two agents, Bettina Whyte and Luc Despins, representing the Unsecured Creditors Committee, to negotiate a settlement to the Cofina-Commonwealth dispute and the split of the sales and use tax. The settlement involving the new Cofina securities was conducted by several judges.
“This settlement forms the foundation for the island’s recovery. It will provide $350 million to the commonwealth that is expected to grow and to move forward,” Rosen said.
Other declarations were submitted into evidence including one from the Cofina agent and from David Brownstein, a director at Citigroup who is an adviser to the fiscal board.
Peter D. DeChiara, a lawyer representing the Service Employees International Union and United Auto Workers, said Puerto Rico cannot afford the Cofina deal, which will put the commonwealth at risk if another natural disaster strikes or goes into a deep recession.
“The commonwealth remains on the hook to pay settlement,” he said. If there are not enough resources to meet Cofina debt payments, they will have to come out from the general fund, he added.
In response to a question from Judge Swain, DeChiara said the court cannot rely on the commonwealth, despite supporting the deal, because it was who got into debt in the first place. The union is concerned that the commonwealth will be left without resources to provide services or pay pensions.
Rolando Emmanuelli Jiménez, who represents ProSol-Utier, the solidarity program of the Puerto Rico Electric Power Authority’s Irrigation & Electrical Workers Union, said his organization was a party in interest because their members will be left in the dark if the commonwealth is left without resources.
“In exercising independent judgment, the court must consider all factors relevant to the wisdom of the compromise…. The motion and declaration of Jaresko does not contain any analysis showing the commonwealth can afford the Cofina deal,” he said, adding that the split will give too much of the revenue to Cofina and very little to the commonwealth.
Judge Swain set aside time from the hearing to hear arguments from members of the public that she selected randomly, many of which were retirees who worried about how the deal would impact their pensions.
Miguel David, a member of a group that advocates for an audit of the island’s debt, said he looked at audited financial statements from 2012 and 2013 and noted that despite the imposition of austerity measures back then, the debt increased by nearly $25 billion. “So austerity measures will not help,” he said.
Eulalia Centeno, a teacher, worried that the deal could curb resources for the commonwealth that would impact services and pensions. “This deal has implications for teachers and police and will take them to bankruptcy,” she said, adding that the teachers have a proposal that would protect pensions and spur economic development.
Luc Despins, the lawyer for the Unsecured Creditors’ Committee who negotiated the settlement to the dispute that divides the sales and use tax proceeds, said it was the best that could be obtained because the law grants Cofina ownership of the funds.
“We did not represent private parties. We were fiduciaries making decisions with other people’s money,” he said. Peter Friedman, a lawyer with Puerto Rico’s Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym), said the settlement was in the best interest of the commonwealth because it would help prevent costly litigation.
Judge Swain then ended the discussion on the Cofina-commonwealth dispute and began to address Cofina’s bond exchange.
Adrianna Irizarrry, a San Juan resident, supported the Cofina restructuring because it would help her recover part of her investment. She said she invested in Cofina junior bonds and ended losing more than half of her savings.
“We are now facing the possibility of losing everything. We are aware of the financial challenges facing the island but everyone must contribute in some way…. I have already given the government half of my savings,” she said.
Julio López Varona, a coordinator with Hedge Clippers, a group that works to publicize hedge-fund moves, noted that many Puerto Ricans who have left the island in search of better opportunities would like to return but will be unable to do so if the Cofina restructuring worsens the economy.
He said the courtroom was full of white men while the people protesting outside the court were “black and brown.” He said the government was pushing a deal that had nothing to do with Puerto Rico and a lot to do with making “white men” in Wall Street and at the Hato Rey Golden Mile very rich. Emille Nieves, a retiree, said the Cofina restructuring will condemn numerous people to poverty, especially retirees.
Eva Prados, a lawyer and human rights advocate who is a member of an organization that also seeks to audit the debt, said her remarks without the help of a translator because she was afraid she would use up her 5 minutes and accused the judge of discriminating against Spanish speakers.
She stressed the need to audit Cofina because “we do not have information as to how this debt was accumulated and we are the ones who will pay for it.”
During the discussion on the bond exchange, Michael Firestein, a lawyer for the fiscal board, succeeded in convincing the judge to declare that ProSol-Utier had no standing to challenge the Cofina deal or Jaresko’s sworn statement.
Firestein noted that ProSol-Utier was not affected by the bond exchange because it did not own bonds. However, Emmanuelli Jiménez, argued that the union represented employees and retirees affected by the distribution of the Cofina debt. But Firestein said that while ProSol-Utier could object to the Cofina-Commonwealth split because the amount of revenues going to the commonwealth will have an impact on them, they would not be affected by the bond exchange or the distribution of the sales and use tax revenues to pay Cofina bondholders.
ProSol-Utier was the only group whose objection contained a study, by economist José Alameda, that found the Cofina deal unsustainable. When Judge Swain said she did not see in the study arguments on the feasibility of the bond exchange, Emmanuelli Jiménez said they were there. The judge, however, said ProSol-Utier must be directly impacted and ruled it had no standing.
Meanwhile, Rosen presented evidence to the court that a majority of Cofina’s bondholders were in agreement with the bond-exchange portion of the plan. He mentioned that about 8,000 local bondholders voted in the deal.
Besides hearing testimony on the bond exchange, the judge was hearing a dispute Thursday involving Cofina’s trustee, the Bank of New York Mellon, which is seeking protections against future litigation.