Puerto Rico Sales Tax Financing Corp. publishes audited statements

Executes disclosure agreement on restructured bonds

SAN JUAN — The Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym), through its independent board, has published the audit of its financial statements for fiscal years 2017 and 2018.

In a release, Cofina says their publication “demonstrates continued commitment to provide timely financial reporting” and “to meet its obligations to its bondholders as part of its return to the capital markets.”

The corporation also executed a “Continuing Disclosure Agreement” in “connection with the issuance of the Restructured Sales Tax Bonds…, setting forth its financial disclosure commitments for future financial reports including the audit for its current fiscal year that ends on June 30, 2019.”

Not only has Cofina restructured its legacy debt and established an independent board as required by its Plan Support Agreement, the release stressed, it has also become “one of the first issuers” in Puerto Rico to “become current” with the publication of its audited statements.

On June 10, Cofina invited “beneficial holders of certain series of COFINA’s federally taxable Restructured Sales Tax Bonds for federally tax-exempt bonds,” a bond exchange that is part of the corporation’s agreement with its bondholders “pursuant to a Tax Exemption Implementation Agreement…to initiate the Bond Exchange upon entering into an agreement with the U.S. Internal Revenue Service that would, when coupled with certain other actions (including the Bond Exchange), permit such an exchange to occur.”

Cofina’s bond exchange expires July 26.




Invitation to exchange Puerto Rico Cofina bonds issued

(CreditDebitPro on Visualhunt.com)

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.

For further information, visit: https://emma.msrb.org/ContinuingDisclosureView/ContinuingDisclosureDetails.aspx?submissionId=ER950924.




IRS deems Puerto Rico’s Cofina bonds tax-exempt

A credit card reader (Screen capture of www.fortaleza.pr.gov)

About $12 billion in restructured bonds to be offered in July

SAN JUAN — The Internal Revenue Service (IRS) recently informed the government of Puerto Rico that it will exempt the Puerto Rico sales and use tax revenue bonds issued by the Sales Tax Financing Corp. (Cofina by its Spanish acronym) from federal taxes, according to a notification published by the island’s Financial Oversight and Management Board.

The tax-exempt bonds will be offered at the end of the month to Cofina bondholders and issued in July.

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.

Cofina, Puerto Rico’s Fiscal Agency and Financial Advisory Authority and the fiscal oversight board had agreed that if the IRS 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.

The parties to the Tax Exemption Implementation Agreement had further agreed that the yield on the exchange bonds will be 25 basis points lower than that of the Cofina bonds for which they were exchanged.

On May 15, Cofina received a determination from the IRS that will permit Cofina to offer to exchange the current bonds for the new tax-exempt bonds.

“Cofina expects to launch an exchange offer on or prior to May 31, 2019 pursuant to which holders of 2019 A-2 B-2 Bonds will be provided with the opportunity to exchange their 2019A-2 B-2 Bonds for an equal principal amount of Exchange Bonds,” the notification states.

It is expected that the exchange bonds will be issued, and the exchange transaction consummated on or about July 1.




Swain’s World: Viability of Cofina Deal Stirs Questions

Ambac Denies it is not Backing Cofina Bonds; Supports Repeal of $6 Billion in GOs

Editor’s note: The following was first published in the April 18-24, 2019, issue of Caribbean Business.

Ambac Assurance Corp. (AAC), which insures Puerto Rico Sales & Use Tax Financing Corp. (Cofina) bonds, has denied allegations made by certain Cofina bondholders that it is no longer backing the bonds as part of Cofina’s debt-adjustment plan.

The debt-adjustment plan, which went into effect in February, restructured about $16 billion in island debt.

Under the Cofina term sheet, holders of AAC insured senior Cofina bonds had two options. The first was to commute their rights with respect 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 the ACC. The second option was to exchange their senior Cofina bonds for trust certificates issued by a custodial trust, which the trust would get distributions from Cofina under the new bonds plus payments under the existing AAC insurance policy to cover any shortfalls.

Sources close to Ambac said 75 percent of the Cofina junior bondholders took the first option and “tore up” the policy. The remaining took the second option and have their policy intact. Ambac, according to sources, is on the hook to pay what is owed on the policy if Cofina ever defaults. In the meantime, Ambac must pay any shortfalls if Cofina is unable to pay the entire value of the bonds. For instance, if a bondholder gets 93 percent of the value of the bonds in Cofina payments, the insurer will have to pay the 7 percent difference on the value of the bonds that the Cofina bondholder did not receive.

Ambac, meanwhile, filed a motion April 10 to support the bonds issued by the Public Buildings Authority from government attempts to prevent them from getting priority status payment, while supporting efforts from the commonwealth to repeal some $6 billion in general-obligation (GO) debt issued in 2012 and 2014. Financial Guaranty Insurance Co. and National Public Finance are also supporting the repeal of the $6 billion debt, even as thousands of bondholders have filed documents.

Meanwhile, certain banks, including the Bank of New York Mellon and Bank of America, are objecting to attempts to compel them to provide information on secured bondholders.

Trillions in claims

On April 15, the commonwealth and other debtors filed more than a dozen objections to thousands of monetary claims filed by creditors that were either duplicates or defective, where creditors could not provide evidence of a real claim.

In 2017, the commonwealth, Puerto Rico Electric Power Authority, Highways & Transportation Authority (HTA) and Employees Retirement Systems (ERS) filed for bankruptcy protection under the federal law Promesa, which creates a bankruptcy process for territories. Most of the objections were related to claims filed against the ERS, which filed for bankruptcy May 21, 2017.

On Jan. 16, 2018, the debtors filed their motion for order to establish deadlines and procedures for filing proofs of claim and the manner of the notice. That deadline was June 29, 2018.

“Of the proofs of claim filed, about 55,000…[were] in relation to the ERS. The ERS-related proofs of claim total about $10.1 trillion in asserted claims, in addition to unliquidated amounts asserted. As noted above, because the ERS is a special-purpose entity with only about $2.9 billion in funded indebtedness, it is clear that substantially all such claims are inappropriate,” one of the objections read.

To efficiently resolve as many of the unnecessary proofs of claim as possible, the debtors filed an order Oct. 16, 2018, seeking limited omnibus objection procedures and waiving certain requirements. The order was later revised.

“Each of the deficient claims purports to assert liabilities well in excess of $1 billion but fails to provide a basis for asserting a claim against the ERS, the commonwealth or another of the debtors. Of the deficient claims, one asserts liabilities in the amount of $32 billion, but states as a basis for the claim that claimant is a teacher who has provided services, without providing any information regarding salaries or benefits owed to the claimant by the ERS, the commonwealth or any other debtor,” one of the objections says.

There were 165,466 proofs of claim filed against the debtors, which total $43.5 trillion. Some 2,336 claims were filed against the HTA, totaling $83.1 billion, which means most claims were duplicates. Of the proofs of claim, about 103,329 were against the commonwealth, which filed five omnibus objections to object to duplicates. It also filed several objections to claims that were deficient.

The commonwealth is currently trying to repeal about $6 billion in GO debt it claimed was illegally filed. The Unsecured Creditors Committee is trying to annul $3 billion in ERS bonds that were also issued in violation of the law in 2008.

Secured Creditors of the ERS, headed by Andalusian Global Designated Activity Co., on April 15 asked Magistrate Judge Judith Dein, one of two judges overseeing the bankruptcy process, to compel the commonwealth, the ERS and P.R. Fiscal Agency & Financial Advisory Authority to produce some 509 documents that they wrongly withheld, using as an excuse the attorney-client privilege. It is part of a process from creditors to seek a trustee for the ERS. Regarding Andalusian, the company is also seeking a protective order after the island’s Oversight Board sought to do depositions on more than 23 different topics that lawyers for Andalusian, Mason Capital Master Fund and Puerto Rico Fund say are burdensome and broad.

In addition, this week, Judge Laura Taylor Swain announced there will be an omnibus hearing in San Juan on April 24.




Swain’s World: Ambac no Longer Backing Cofina Bonds

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.




Creditor group presses Puerto Rico fiscal board to reveal avoidance claims

Editor’s note: The following originally appeared in the March 28 – April 3, 2019, issue of Caribbean Business.

Court orders board to show cards by April 1

One group in Puerto Rico’s bankruptcy case that has been most vocal and has perhaps conducted a thorough oversight of the commonwealth’s expenditures is the Unsecured Creditors Committee (UCC). While the committee, represented by lawyer Luc Despins, is merely trying to increase the amount of money it can recover from the government, it has brought to light issues that may otherwise go unnoticed by court observers.

Federal Court Judge Laura Taylor Swain recently granted a request from the UCC that sought to set expedited deadlines for procedures for Puerto Rico to bring avoidance actions in its bankruptcy cases because of a looming May deadline.

Avoidance actions are any and all avoidance, recovery, subordination or other claims, actions or remedies that may be brought by or on behalf of the debtors or other authorized parties in the bankruptcy proceedings. They typically go against individuals or corporations that obtain payments from the debtor 90 days before the bankruptcy filing but can go further into the past. The debtor in these cases attempts to recoup money it has already paid.

The UCC said that despite repeated requests, the island’s fiscal oversight board has yet to submit a list of avoidance actions it intends to pursue.

As a matter of fact, since last year, the UCC has been trying to deal with avoidance claims. On Nov. 27, 2018, the committee filed a motion, which was granted Dec. 14, 2018, seeking discovery of Title III debtors, except for the Sales Tax Financing Corp. (Cofina by its Spanish acronym), to investigate whether they may have viable claims for avoidance actions against third parties. “The [UCC] believes it is critical to now move this investigation forward given the potential expiration of certain claims in May 2019. Specifically, the committee is seeking disclosure with respect to pre-petition transfers of property valued at $3 million or more in the two years immediately preceding the dates on which the debtors commenced the Title III cases,” they said.

Following the judge’s order earlier this week, the Oversight Board must provide a list by April 1 of the avoidance actions it will pursue. The UCC wants to be allowed to submit a motion seeking the appointment of a trustee to assert avoidance actions.

There are other matters the UCC has brought to light that in many ways have steered the commonwealth’s Title III case.

The committee litigated, on behalf of the commonwealth, the question of whether billions of dollars in sales & use taxes are the property of the commonwealth or Cofina, litigation resulted in a settlement that will allow the commonwealth to retain $28 billion in such taxes over the next 40 years. The UCC had serious concerns with respect to the restructuring of the Government Development Bank (GDB) because it purported to transfer the lion’s share of the GDB’s valuable assets away from the Title III debtors and to a newly formed entity for the benefit of certain consenting creditors. Moreover, the committee was concerned the GDB restructuring would result in Title III debtors losing valuable claims they may hold against this bank and current and former officers and directors of the GDB, before there has been an adequate investigation with respect to such claims. The committee filed a notice of its intent to object to the GDB’s Title VI qualifying modification and other pleadings, forcing the government to make changes to its restructuring terms.

They raised objections regarding the Kobre & Kim report on the debt. The informative motion points out, among other things, that the final report does not address the merits of any claims, including avoidance actions, whether Puerto Rico’s constitutional debt limit was exceeded or claims against private financial institutions.

The general approach of the final report is to exonerate potentially culpable parties, including by volunteering conclusions and presumptions that give the impression that there was no wrongdoing. Despite the final report’s efforts to exonerate, it still identifies highly troubling conduct by the GDB leadership, including swap transactions, GDB’s role as the government’s fiscal agent, the $3.5 billion general-obligation (GO) bond offering in March 2014 (though the report does not address potential claims of the debtors that could have arisen from the circumstances of the GO bond offering). Ultimately, they say the final report is of limited utility because it is impossible for any interested party to follow up on the investigator’s efforts.

The UCC was also behind efforts to stop the government from paying legal expenses to Bonistas del Patio, arguing that they were not part of any Title III case. The committee is also questioning the legality of the $6 billion in GO debt incurred after 2012, and the legality of Public Buildings Authority bonds.

The UCC joined the Oversight Board in seeking information from monoline bond insurers about their losses in their attempt to establish a receiver for the Puerto Rico Electric Power Authority.

In related news, the U.S. First Circuit Court upheld two lower court rulings, stating that certain GO bondholders do not have a lien on revenues and, in the second, that government is not obligated to pay pledged Highways & Transportation Authority revenue to bondholders.




Swain’s World: As Cofina Deal Goes Into Effect, Legal Challenges Pop Up

Editor’s note: The following originally appeared in the Feb. 21 -27, 2019, issue of Caribbean Business.

Bondholders of the Puerto Rico Sales Tax Financing Corp. (known as Cofina by its Spanish acronym) are moving forward with court challenges against the debt-adjustment plan although restructured bonds have begun to trade in the market.

Several labor unions and independent Rep. Manuel Natal provided notice they had filed an appeal in the U.S. First Circuit Court of Appeals against the deal. On the other hand, Elliot Asset Management, a Boston-based investment firm, said it was also going to challenge Cofina’s debt-adjustment plan, arguing it is unconstitutional.

James Sparks, principal at Elliot Asset Management, said Cofina’s debt-adjustment plan, approved Feb. 5 by the U.S. District Court, left junior Cofina bondholders with disproportionate losses of their investments while others are reaping benefits. He said the deal violates the constitutional contract clause that prohibits laws that retroactively go against contracts as well as the takings clause, which requires the government to pay just compensation for the taking of private property.

“No court can override the Constitution,” Sparks said, when asked about clauses in the deal that prevent collateral challenges to it.

The restructuring of Cofina’s $17 billion debt, which went into effect Feb. 12, has two parts. In the first, commonwealth and Cofina bondholders settled their dispute over ownership of the sales & use tax (IVU by its Spanish acronym) by agreeing to divide the 5.5 percent portion of the 11.5 percent IVU. From the 5.5 percent portion, Cofina will keep 53.6 percent and the commonwealth receives the rest. Secondly, under the debt plan, Cofina bondholders were to exchange their current bonds for new bonds whose value was cut. While Cofina senior bondholders are slated to recover 93 percent of the value of their original bonds, junior bondholders are slated to recover only 53 percent.

No adjustment without representation

The central argument of the proposed lawsuit is that junior Cofina bondholders were inadequately represented in the negotiations that led to the debt-adjustment plan and, as a result, obtained an unjust compensation for what they had invested.

According to a tabulation summary submitted Jan. 15 by Prime Clerk, the case manager, the Cofina bondholders were divided into 10 classes to determine which were entitled to vote. Holders in Class 4 (Senior Cofina Bond Claims [Taxable Election]) and Class 7 (Junior Cofina Bond Claims [Taxable Election]) were deemed to accept the plan. Class 10 or Section 510(b) Subordinated Claims were deemed to reject the plan and were not eligible to make an election of distribution under the plan.

The tabulation summary of the remaining classes, from 1 to 9, concluded that a majority supported the plan. In Class 1—consisting of Senior Cofina Bond claims with about 1,849 ballots—about 85.5 percent accepted the plan in its entirety, while 14.4 percent rejected it. In Class 2, consisting of Senior Cofina Bond claims held by Ambac, there was only one vote accepting the plan. Class 3, consisting of Senior Cofina Bonds held by National, only listed one vote for the plan. In Class 5, consisting of Junior Cofina bonds, about 67.5 percent of the 9,359 votes supported the plan while 32.4 percent rejected it. Class 6, comprising junior Cofina bonds held by Assured, only showed one vote, which was in favor of the plan. Class 8, composed of GS Derivative claims, showed that no ballots were received and was deemed to have accepted the plan. In Class 9, comprised of general unsecured claims, only two ballots were received, which were in favor of the plan.

During court proceedings to approve the plan, several junior Cofina bondholders complained they had not been involved in the negotiations over the Commonwealth-Cofina dispute involving ownership of the sales & use tax revenue. Some bondholders said that although Cofina bonds are secured by a statutory lien, money from the IVU was given to the commonwealth without evidence to demonstrate Cofina’s legality—which was challenged by commonwealth general-obligation bondholders—and would not have been upheld by a court of law.

Institutional investors, holding both senior and subordinate bonds that they had bought at very cheap prices, along with the commonwealth and the Financial Oversight & Management Board, were the ones that negotiated the plan of adjustment. A recent Wall Street Journal report quoted an anonymous Oppenheimer Fund source as stating that junior bondholders got the wrong deal in the bargain.

Sparks said losses incurred by junior bondholders as part of the deal were unjustified because Cofina was a solvent entity before it filed for bankruptcy and there is currently enough money to pay bondholders the amounts that they are due. Under the design of the debt-adjustment plan, however, “seniors are getting more than a dollar and juniors less than 50 cents,” he said.

This week, Cofina investors participating in the bond exchange, which went into effect Feb. 12, noticed that their accounts did not add up. Cate Long, who leads a research service for Puerto Rico bondholders, published on Twitter that a subordinate current interest bond, which should have had a recovery of 56 percent or $2,800 (56% of $5,000). “Instead, the bondholder was given $1,086 between cash and one splinter bond. Useless,” she wrote.

Junior Cofina bondholders got an unfair deal because they were represented in negotiations by groups that also held senior Cofina bonds in a conflict of interest. Franklin Templeton sold the lion’s share of its Puerto Rico debt, including Cofina junior bonds. Five of the funds in the Cofina Senior Bondholders Coalition—Aristeia Capital, GoldenTree, Old Bellows, Tilden Park and Taconic Capital—made huge purchases of more than $1 billion in subordinated bonds just after Hurricane Maria, when prices fell.

Groups such as the Senior Bondholders Coalition could not represent junior bondholders while also representing senior bondholders at the same time. The president of Elliot Asset Management said the Senior Coalition’s only claim to junior representation is the fact that many senior bondholders also own junior bonds, which were purchased at rock-bottom prices.

“All those people bought the bonds at cheap prices, bought votes and made a lot of money,” said Elliot, whose firm represents many individual retail Cofina bondholders.

Bonistas de Patio, a local nonprofit group representing bondholders that claimed to represent bondholders in general, were inaccessible. “Nobody could reach them. They did not return calls,” Sparks said, adding that a request made by Bonistas for $7 million in legal fees for their role in the debt-adjustment plan “is ridiculous.”

Frequent flyers?

Elliot said the process that led to the confirmation of the Cofina deal was also done in a way that made it difficult for investors to make an informed choice or to even cast votes against the deal—in part because the “800 pages of legalese” was mailed during the holiday season when many investors were traveling.

He also criticized Judge Laura Taylor Swain for sidetracking many retail investors. After initially saying she was going to take letters sent to her for her consideration in the process, she then said she would only take into account legal documents submitted in court. “She said in court she was considering all letters…. Many of us wrote in [to her],” Elliot said.

In court documents prior to the confirmation of Cofina’s debt-adjustment plan, Elliot had suggested alternatives to the deal’s current distribution. “Putting aside the fact that there exists enough revenue to cover all existing Cofina bonds, and since most outstanding Cofina bonds are callable, the commonwealth could immediately call the existing bonds and then issue new bonds with lower interest rates. The commonwealth would save money on interest going forward and satisfy 100 percent of its outstanding, and constitutional, obligations to Cofina bondholders,” he said.




Cofina debt adjustment plan running into problems, challenged

SAN JUAN – Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) bondholders who on Feb. 12 began the process of exchanging their bonds for new ones started noticing that their accounts did not add up to what they were promised under the debt adjustment plan.

For instance, Cate Long, who leads a research service for Puerto Rico bondholders, tweeted that a bondholder apparently got less than originally promised. A “subordinate current interest bond which should have had a recovery of 56 or $2,800 (56% of $5,000) Instead bondholder was given $1,086 between cash & one splinter bond. Useless,” she wrote.

That is just one of the problems with Cofina’s debt adjustment plan. Now, Cofina bondholders are moving forward with different court challenges against its debt adjustment plan as restructured bonds have begun to trade in the market.

Several labor unions and independent Rep. Manuel Natal announced that they had filed an appeal in the U.S. First Circuit Court of Appeals against the deal. Also, Elliot Asset Management, a Boston-based investment firm, said it was also going to challenge the adjustment plan, arguing it is unconstitutional.

James Sparks, principal at Elliot Asset Management, said Cofina’s debt adjustment plan, which was approved by the U.S. District Court on Feb. 5, has left junior Cofina bondholders with disproportionate losses while others are reaping benefits. He said the deal violates the constitutional contract clause that prohibits laws that retroactively go against contracts and the takings clause, which requires the government to pay just compensation for private property.

“No court can override the Constitution,” Sparks said when asked about clauses in the deal that prevent collateral challenges to it.

The restructuring of Cofina’s $17 billion debt, which went into effect Feb. 12, has two parts. In the first, commonwealth and Cofina bondholders settled their dispute over ownership of the sales & use tax (IVU by its Spanish acronym) by agreeing to divide the 5.5 percent portion of the 11.5 percent sales & use tax. From the 5.5 percent portion, Cofina will keep 53.6 percent and the commonwealth receives the rest.

Secondly, under the debt plan, Cofina bondholders were to exchange their current bonds for new bonds whose value was cut. While Cofina senior bondholders are slated to recover 93 percent of the value of their original bonds, junior bondholders only recover 53 percent.

The central argument of the proposed lawsuit is that junior Cofina bondholders were inadequately represented in the negotiations that led to the debt adjustment plan and, as a result, obtained unjust compensation for their investment.




Puerto Rico, fiscal board seek court help for new Cofina bonds’ tax exemption

SAN JUAN – In connection with the consummation of the debt adjustment plan for the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym), the government-owned corporation, the island’s Financial Oversight and Management Board and its Fiscal Agency and Financial Advisory Authority (Aafaf by its Spanish acronym), along with certain bondholders such as Ambac Assurance Corp., have filed a document in court, seeking a ruling or an agreement with the Internal Revenue Service, declaring the new Cofina bonds tax-exempt.

The “Tax Exemption Implementation Agreement” was filed in court Wednesday and provides that the parties “shall, among other things, continue to use reasonable best efforts to pursue a private letter ruling or other agreement with the Internal Revenue Service regarding the tax-exempt nature of the Exchange Bonds (as defined in the Tax Exemption Implementation Agreement).”

The tax exemption is defined as any bond whose interest is excluded from gross income for purposes of the federal income tax.

The restructuring of Cofina’s $17 billion debt, approved earlier this month, has two parts. In the first, commonwealth and Cofina bondholders settled their dispute over ownership of the sales & use tax (IVU by its Spanish acronym) by agreeing to divide the 5.5 percent portion of the 11.5 percent sales & use tax. From the 5.5 percent portion, Cofina will keep 53.6 percent and the commonwealth receives the rest. According to court documents, the split will result in the commonwealth receiving about $400 million a year from the sales & use tax over the next 40 years.

Secondly, under the debt plan, Cofina bondholders will exchange their current bonds for new bonds whose value is being cut. Cofina senior bondholders will recover 93 percent of the value of their original bonds and junior bondholders 53 percent.

Cofina said it filed a request in December for a private letter ruling or closing agreement with the IRS with respect to the new Cofina bonds, which began to be traded Feb. 12.

“Severely limited IRS operations during the recent federal government shutdown have hindered the IRS’s ability to make important determinations relating to the potential tax-exempt nature of certain of the Applicable Bonds…and such determinations may not be made prior to the Effective Date,” the agreement reads.

The agreement is slated to end Jan. 1, 2020, or if the IRS issues a ruling.




Puerto Rico governor appoints new members to Cofina board 

SAN JUAN – The office of Gov. Ricardo Rosselló, La Fortaleza, has announced that he has appointed Daniel Heimowitz, Richard Kolman and Alexandre Zyngier to the Puerto Rico Sales Tax Financing Corp.’s (Cofina by its Spanish acronym) board effective Feb. 12.

The new board held its first meeting Feb. 12, after a plan of debt adjustment for Cofina became the first under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa) to be achieved. About $12 billion of restructured sales tax revenue bonds was issued that day as well.

La Fortaleza said the new board members are “highly qualified and nationally respected individuals, bringing tremendous municipal finance experience and sophistication to COFINA:

  • Daniel Heimowitz. Mr. Heimowitz is the founder and chief executive officer of Verify Financial, a start-up firm that uses credit views, peer sourced from institutional investors, to enhance traditional credit grading. Mr. Heimowitz’s forty-plus-year career has been in public finance credit ratings and investment banking, having held senior positions at Moody’s, Lehman Brothers, and RBC Capital Markets. Throughout his career, he has been an active municipal market participant as a member of The Municipal Analyst Group of New York, The National Federation of Municipal Analysts, and The Society of Municipal Analysts, and as a past member of the Government Accounting Standards Advisory Council and President of the Municipal Forum of New York. Mr. Heimowitz served on the Municipal Securities Rulemaking Board (MSRB) from 2012 to 2014 and was MSRB’s Chairman in 2014.

  • Richard Kolman. Mr. Kolman presently serves as the head of the municipal group and member of the firm-wide operating committee for Academy Securities, a military and disabled veteran-owned investment bank. Following a twenty-five year career with Goldman Sachs, Mr. Kolman left his position in 2007 as co-head of the municipal department at Goldman Sachs to serve as vice chairman of the Municipal and Infrastructure Assurance Corporation until 2010, when Mr. Kolman became a managing director and head of the municipal securities group at US Bank. Mr. Kolman left his position at US Bank in 2016 for his current role at Academy Securities. Mr. Kolman has served on the executive committee of the Securities Industry and Financial Markets Association (SIFMA) and received the SIFMA Lifetime Achievement Award in 2007. He also was a member of the Municipal Securities Rulemaking Board from 1996 to 1999 and is presently a member of the municipal executive committee for SIFMA. For over fifteen years, Mr. Kolman has served on the board of managers for the East Side House Settlement, a community-based organization serving the Mott Haven district of the South Bronx. He presently serves as treasurer and chair of the Finance Community.

  • Alexandre Zyngier. Mr. Zyngier has over twenty years of investment, strategy, and operating experience. In 2013, Mr. Zyngier founded Batuta Advisors to pursue investment and advisory opportunities in both the public and private markets. Mr. Zyngier has extensive experience serving on boards of directors. He is currently a director of Atari SA, Torchlight Energy Resources, Inc., AudioEye Inc., Applied Minerals, Inc., and certain other private entities. he was previously the chairman of the board of Vertis Inc., a director of Island One LLC and executive chairman of DTV America Corporation. Mr. Zyngier holds an MBA in Finance and Accounting from the University of Chicago and a BSc in Chemical Engineering from UNICAMP in Brazil.”