Friday, August 23, 2019

Judge Swain Evaluating Cofina Fiscal Plan

By on January 11, 2019

Editor’s note: The following originally appeared in the Jan. 10-16, 2019, issue of Caribbean Business.

Objections raised about the plan to restructure the $17 billion debt of the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym), not only from bondholders but also from the public, could force U.S. District Court Judge Laura Taylor Swain to thoroughly scrutinize it.

As a matter of fact, Swain made good on her word to hear the general public, which will have until today, Jan. 11, to file requests in court to be able to speak at the Jan. 16 hearing in which she will be evaluating Cofina’s plan. “The court will randomly select persons to participate at the hearing if more than 24 persons request permission to participate,” she said.

The Cofina debt-adjustment plan is twofold. First, it would settle the dispute between commonwealth and Cofina bondholders over ownership of the revenue from the sales & use tax (known as IVU by its Spanish acronym). Under the settlement, about 53.5 percent of the pledged sales & use tax will go to Cofina and about 46 percent to the commonwealth. The deal, secondly, will restructure the debt with Cofina bondholders, who will exchange their current bonds for new bonds whose value will be cut by 32 percent. Senior bonds were cut by 7 percent—they will recover 93 percent of the nominal value of the bonds while junior bonds were cut by 46 percent, enabling a recovery of 53.9 percent of the bonds’ value.

Opponents of the deal say the debt-adjustment plan will result in a worsening of the economic crisis due to the imposition of more austerity measures, cuts in public services and pensions over the next 40 years and another debt default.

The Oversight Board has received more than 322 letters, with most rejecting the plan. One of them contained a report from the nonprofit entity Espacios Abiertos, with materials attached from co-author Joseph Stiglitz related to Puerto Rico’s economic condition. The report says the terms of Cofina’s restructuring do not provide enough relief for Puerto Rico to be able to achieve future growth because Puerto Rico’s annual debt payments would increase from $420 million in fiscal year 2019 to nearly $1 billion in FY 2041, leaving little for local investment.

Justice for all?

The Justice Department was slated to file an opposition from the Internal Revenue Service but failed to do so because of the federal government shutdown.

One of the first opponents of the Cofina deal was GMS Group, which owns $500 million in Cofina junior bonds distributed in the accounts of more 5,000 retail clients, including $40 million in GMS proprietary accounts. In opposing the deal, GMS Group noted Cofina may have filed for bankruptcy fraudulently as the government has not provided audited financial statements since 2015 for the “obvious reason” it would negate Cofina’s ability to be a debtor. They contend the Oversight Board and the government manipulated the debt-adjustment plan because Cofina is controlled by the Oversight Board, which also represents the government in the Title III bankruptcy case.

The Programa de Solidaridad de la Union de Trabajadores de la Industría Eléctrica y Riego (Prosol-Utier), the solidarity program of Prepa’s Irrigation & Electrical Workers Union (Utier), filed a separate objection stating the debt deal is not in compliance with Promesa and results in direct injury to the Puerto Rican people. Prosol-Utier used as a basis for its objection the conclusions of a report written by economist and professor José Israel Alameda-Lozada, which concludes that the Commonwealth of Puerto Rico and Cofina Fiscal Plans do not comply with Promesa, among other things, because they lack dependable revenue and expenditure projections that are indispensable for addressing the confirmation of Cofina’s debt plan. “In essence, Dr. Alameda[-Lozada] concludes that it can reliably be foreseen that the Cofina Plan will bring many unreasonable and negative economic and social consequences to Puerto Rico, that this Honorable Court is now in the position to prevent, such as the impairment of the resources available to pay for essential services and for the pensions of more than 167,000 retirees,” the organization said.

According to Alameda-Lozada, Puerto Rico assumes all risks in the Cofina Plan. If Cofina goes into default as part of the repayment, the money to pay must come from commonwealth resources.

The plan also does not account for the impact of the recent tax reform on Cofina revenues. The reform phases out the business-to-business tax and cuts the sales & use tax on prepared foods.

Back in August, when the Cofina deal was reached in principle, the Oversight Board and the government said the accord provides for more than a 32 percent reduction to Cofina’s debt and puts an end to costly litigation.

On the other hand, the Cooperativa de Ahorro y Crédito de Rincón, which seeks $75 million from Cofina; the Cooperativa de Ahorro y Crédito Dr. Manuel Zeno Gandía, which seeks $9 million; the Cooperativa de Ahorro y Crédito Del Valenciano (ValenCoop), which seeks $1.9 million; and the Cooperativa de Ahorro y Crédito de Juana Diaz, which Cofina owes $2.3 million, contend the debt-adjustment plan ignores or disregards the existence and effects of ongoing litigation initiated by them in violation of Promesa.

Meanwhile, René Pinto Lugo of Vamos, Movimiento de Concertación Ciudadana Inc., seven labor unions and Rep. Manuel Natal Albelo, who is independent, informed the court that pending before the Superior Court of Puerto Rico is a challenge to Act 241 of Nov. 15, 2018, which amended the Cofina-enabling law to help execute the debt settlement. They claimed that Act 241 is unconstitutional because, as part of the legislative process in passing it, House regulations were violated, including the free speech rights of Natal Albelo.

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