Tuesday, September 24, 2019

Local bondholders support agreement to restructure Cofina debt

By on August 10, 2018

SAN JUAN – Puerto Rico bondholder group Bonistas del Patio informed its members that the agreements reached to restructure the Sales Tax Financing Corp.’s (Cofina by its Spanish acronym) debt both in June and last week are extraordinary achievements that will help the government and local bondholders.

The island’s fiscal oversight board and Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym) recently announced a proposal for restructuring Cofina’s debt, which was supported by a large number of the public corporation’s bondholders, who hold both senior and subordinated debt.

“This preliminary agreement was reached through the mediation process ordered by Judge Laura Taylor Swain, in which Bonistas del Patio was the only nonprofit entity that was authorized to participate and was an integral part of these negotiations,” the group’s president and executive director, Rafael Rojo and Jorge Irizarry, respectively, said in a statement.

If the agreement, which was negotiated by the court, is finalized, a portion of the sales-and-use tax (IVU by its Spanish acronym) would be shared for to pay Cofina debt under the following conditions: Existing bonds would be exchanged for new bonds to be issued under a single Cofina bond class (i.e., there would be no senior or subordinated debt) as follows: Senior bondholders will receive approximately 93% of the principal of the bonds they currently hold.

Holders of subordinated debt will receive about 56% of the principal of the bonds they currently hold. The average interest they would receive on the new face value would be 4.75%. An additional allocation of 2% of the total principal is made to those bondholders who vote in favor of the proposed restructuring. Taking into account that additional 2% and depending on the effective date of the exchange and the number of bondholders that vote in favor of the agreement, the eventual recovery of senior holders could vary between 96.7% and 95.08%, and for subordinates between 60.1% and 58.48 %.

The agreement was achieved within parameters previously agreed between the two agents appointed by the federal court to represent the interests of the government and Cofina’s creditors, respectively, announced June 5 and establishing that the Pledged Sales Tax Base Amount, or PSTBA, assigned to Cofina, which represents about 2.75% from 5.5% of the IVU (the maximum allotted to pay Cofina’s debt), and which in 2019 would total about $738 million, will be divided between Cofina, 53.65%, and the government, 46.35%.

“This means that the part of the IVU that was previously used to pay Cofina’s debt ($738 million for 2019), is almost halved ($396 million, or 1.4% of the IVU),” the group said.

According to Cofina’s legal structure, the $396 million increase 4% annually to a maximum of $1.85 billion to pay Cofina’s debt in the next 40 years. The 46.35% of the PSTBA, or $342 million, which was previously used to pay Cofina’s debt, will be deposited in the General Fund and will be available for government use, along with the rest of the 10.5% of the IVU that goes to the government, which for 2019 is estimated at about $2.1 billion.

Under the most recent agreement, Cofina holders receive new, closed senior lien bond secured by the 5.5% pledged sales and use tax, and the government commits to not altering this new allocation in the future. The total of new bonds issued would reach $11.9 billion including $9.2 billion of bonds maturing from 2028 to 2043, which pay current interest, and $2.7 billion in capital appreciation bonds, or CABs, maturing from 2043 to 2058, that accrue interest.

The amount of the annual debt service of the new bonds would be accrued from the first 5.5% IVU revenue each year, but under certain circumstances, the accrual may be deferred in quarterly amounts instead of only at the beginning of the year.

The government undertakes not to issue additional IVU-backed debt, except to refinance some part of the new bonds. As Citigroup has expressed as advisors to the fiscal board, the new bonds would have credit characteristics similar to other municipal bonds payable from the sales tax that enjoy AAA or AA credit ratings, although it cannot be assured that the new bonds would be rated as such immediately.

(Screen capture of www.bonistasdelpatio.com)

“It is our opinion, that within a context of non-payment of the Government’s debt and the fiscal crisis that Puerto Rico is going through, the proposed restructuring is a very important achievement for the residents of Puerto Rico who lent their money to the government when buying the Cofina bonds.

“Puerto Rican investors, who are largely retired, have not received the interest payments that represent their retirement income since June 2016. Under the proposed restructuring, years of uncertainty would end, a long legal process would be avoided and they may begin to receive interest payments on their savings invested in Cofina bonds beginning in 2019. It should be noted that the announced consensus agreement allows the Government of Puerto Rico to begin to recover its credibility in the financial markets, which is vital for the economic recovery and reconstruction of Puerto Rico.

“As we have explained in the past, Bonistas del Patio is a non-profit entity that does not have the legal capacity to vote for or against this or any agreement. Our role has been to advocate on behalf of Puerto Rican bondholders, give them a representative voice in the mediations and achieve the best possible agreement within the difficult circumstances. The agreement must now go through a voting process among all the holders of this debt, as required by the certification process for a consensual agreement under the [Puerto Rico Oversight, Management, and Economic Stability Act], which is expected to take several months and could be completed before the end of 2018,” the group added.

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