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Swain’s World: Ambac no Longer Backing Cofina Bonds

By on April 5, 2019

Cofina Liquidating Trust Assets, Leaving Unsecured those who Chose not to Commute their Insurance for Pennies

Editor’s note: The following originally appeared in the April 4-10, 2019, issue of Caribbean Business.

Holders of Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) bonds got a recent surprise upon learning that Ambac Assurance Corp., a bond insurer, appeared to no longer be backing the bonds after the recent Cofina restructuring.

“Did anyone notice the latest Cofina robbery? Ambac just announced they are liquidating the trust assets securing those few insured who elected not to commute their insurance for pennies. Now, policyholders will get the liquidated value from the trust!” noted Elliot Asset Management, one of the investment firms that has questioned the adjustment plan for Cofina approved by the Title III court in February. The move leaves these Cofina bondholders up in the air.

The debt adjustment plan restructured about $16 billion in island debt.

Under the Cofina term sheet, which contained confusing wording, holders of AAC insured senior Cofina bonds had two options. The first was to commute their rights pertaining to the AAC insurance policy associated with the senior Cofina bonds, which would then be canceled, in exchange for new Cofina bonds, cash amounts to be paid by Cofina and other considerations by ACC. The second option was to exchange their senior Cofina bonds for trust certificates issued by a custodial trust, which would get distributions from Cofina under the new bonds, plus payments under the existing AAC insurance policy with respect to any shortfalls.

It appears Ambac, which participated in the negotiations for the Cofina deal, had tried to cut its losses all along. Claude LeBlanc, CEO for Ambac, in a recent conference call involving its fourth-quarter earnings said a key Ambac objective was achieved when the Cofina plan of adjustment went into effect Feb. 12. “Ambac was actively involved in crafting the terms of the consensual agreement, which became the basis for the Cofina plan of adjustment,” he said.

About 75 percent of Ambac’s insured Cofina bondholders elected to commute Ambac’s insurance policies in exchange for cash and new Cofina bonds. “We believe the Cofina Plan of Adjustment along with the associated commutations and collateralized trust structure is a tremendous achievement for Ambac in managing its overall risk exposure,” LeBlanc said.

Through the execution of the Cofina Plan of Adjustment, Ambac fully addressed and significantly reduced its largest single-risk exposures, which represented about 78 percent of Ambac’s total Puerto Rico exposure. After months of intense negotiations, Ambac and other senior Cofina creditors received a 93 percent notional recovery, he said.

Important protections clarifying that the share of sales used in tax earmarks for Cofina are not available resources for the commonwealth and dismissals of challenges to the Cofina structure were achieved. “As a result, Ambac’s insured Cofina exposure and our overall insured Puerto Rico debt-service exposure decreased by $5.5 billion. The 25 percent of holders, who elected not to commute their policies, received units issued by trust. This trust holds a ratable distribution of cash and new Cofina bonds, which will significantly off set Ambac’s remaining Cofina insurance liability,” LeBlanc said.

Through the Cofina transaction, which restructured more than $16 billion in debt, the government of Puerto Rico will receive, according to a P.R. Fiscal Agency & Financial Advisory Authority (Aafaf) press release, access to $425 million annually for the next 40 years.

The avoidance cliff

In addition, this week, U.S. District Judge Laura Taylor Swain granted a request from the Unsecured Creditors Committee (UCC) and ordered Puerto Rico’s Financial Oversight & Management Board to submit by April 5 a preliminary list of potential avoidance actions it intends to pursue.

Avoidance actions are typically those in which a trustee rejects or avoids actions taken by the debtor with respect to its property during a specific time before a bankruptcy filing. For instance, a trustee can seek the return of property sold by the debtor if it was sold fraudulently.

Earlier this month, the UCC filed a motion urging the court to require the fiscal board to start acting on the avoidance actions before a statute of limitations, scheduled for May, ran out.

After the board reveals its preliminary list of avoidance actions, it must then confer with the UCC about the anticipated allocation of litigation responsibilities, the judge said.

The board must then submit its final list of commonwealth avoidance actions, including designations to the committee by April 10. On April 12, the committee must submit a motion seeking the appointment of a trustee who can assert the avoidance actions. The board has until April 15 to file a motion opposing the trustee.

The board and committee will file by April 22 a joint status report related to avoidance actions for other debtors. “The Oversight Board shall file an informative motion disclosing the final list by May 6,” the judge said.

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