Head of Puerto Rico Restaurants Association: Consumers were expecting economic relief
However, says price increases, such as when sales tax was lowered, cannot be controlled
SAN JUAN — The president of the Puerto Rico Restaurants Association (Asore by its Spanish acronym), José A. Salvatella, said Wednesday
that it is impossible to stop restaurants from raising the price of some menu items, as happened Tuesday when the sales and use tax (IVU by its Spanish acronym) reduction on prepared food took effect.
“We can’t control that. They are within their rights. It is a management decision that every business is making and is part of the freedom to do business in Puerto Rico. As an association, we do not recommend that action,” Salvatella said in a radio interview (NotiUno).
He said the market regulates itself and there is no entity that can control prices.
After the IVU cut on prepared food took effect Tuesday, dropping to 7% from 11.5%, people began sharing their restaurant receipts on social media, revealing that the price of certain meals was the same or higher than before as restaurants increased the price of items, thus the tax reduction did not reflect any savings.
“Every consumer must be aware. I would say that those businesses that raised prices—in an informal survey we did—are very few. For the most part, the restaurant industry sufficiently competitive that it is difficult to be able to increase prices at the moment…. It is the minority. The majority of restaurants left the menu intact,” Salvatella said.
He urged those businesses that raised their prices to reevaluate the decision.
“I do not think it is appropriate to raise prices at this time when our consumers expected economic relief,” he concluded.
To address the concern on social media on Tuesday, Lizmarie Medina, the chief marketing officer of the Colón Gerena Group, stressed that neither Wendy’s nor any of the restaurants belonging to the group–Applebee’s, Longhorn, Sizzler, Olive Garden and Red Lobster—have raised prices.
“The measure of lowering the tax to 7% was appropriate and favorable for consumers. Wendy’s, because of that, has implemented it without imposing an increase on any of its products. Increasing prices would go against the measure itself; its reason is to help consumers when purchasing their meals in their daily lives,” the executive said.
—Cybernews contributed to this report.
Prepared food sales tax cut takes effect in Puerto Rico
Treasury: 6,113 establishments meet requisite to charge reduced 7% rate
SAN JUAN — Puerto Rico Treasury Secretary Francisco Parés announced that 6,113 establishments on the island met the requirements to now charge the newly lowered 7% sales and use tax (IVU by its Spanish acronym) that took effect Tuesday instead of the 11.5% charged before.
Businesses that complied “with the four requirements that were established, will be charging as of today an IVU of 7% on prepared foods, carbonated drinks, confectionery products and sweets. The total number of participating establishments will be increasing daily, as the merchants complete the information we have informed them of through their SURI (Unified Internal Revenue System) account,” the official said.
Consumers can access SURI (suri.hacienda.pr.gov) to see the list of businesses authorized to charge 7% and confirm if the restaurant they are visiting can charge the reduced tax. When accessing SURI, click on the link of Authorized Businesses to charge 7% on prepared foods and look for an establishment by municipality or using the name for a quick search.
Treasury recommends checking a purchase receipt before paying a business to confirm the 7% IVU. SURI has a “Confidencias” tool, which is an automated system for receiving and handling complaints related to tax violations. Investigations for the imposition of fines or penalties to those who fail to comply with the law are begun through this confidential system. In addition, referrals may be initiated for relevant investigations and audits by other areas of the Department of the Treasury.
Business owners “who did not receive their authorized business certificate automatically on September 24 must get up to date addressing the deficiency informed in the Department’s notifications, to then request it through SURI,” Treasury said.
It added that businesses “that sell prepared food and have debts with the Department can opt for an automatic payment plan, such as Taxpayer Rehabilitation, also through SURI. That payment plan request will be evaluated and processed quickly once the taxpayer completes and submits it.”
However, establishments that are “not qualified under the indicated NAICS [North American Industry Classification System] codes, should update, while those who need a tax terminal, may consult with any of the 13 processors certified by the Treasury, included in Administrative Determination 19-03,” the agency said.
So far, only 25% of eligible businesses can charge lower sales tax on prepared foods
See which establishments are certified
SAN JUAN — Mere days before a lower sales and use tax (IVU by its Spanish acronym) on prepared food takes effect, only a quarter of eligible businesses have been certified to offer the reduced 7 percent rate, the Puerto Rico Treasury Department said Wednesday.
Treasury has sent reduced IVU certificates to 5,345 businesses that prepare food, or 25.5 percent of the 21,000 businesses registered under the North American Classification System (NAICS) that could qualify for the certification, Treasury Deputy Secretary Ángel Pantojas told Caribbean Business on Wednesday.
“We believe that with the ongoing [business] orientation on the certification process, those numbers will continue to increase,” he said.
In fact, Treasury Secretary Francisco Parés said in a release Wednesday that qualifying establishments may still obtain the Authorized Business Certificate in time to collect the reduced IVU by Tuesday, Oct. 1, when the new rate takes effect.
As certified IVU-withholding agents for Treasury, businesses that sell prepared food, such as restaurants and fast-food outlets, will be able to collect IVU at the reduced 7 percent rate, down from 11.5 percent.
On Tuesday, Treasury sent the 5,345 certificates to the Internal Revenue Unified System (SURI by its Spanish acronym) accounts of businesses that completed the compliance process for certification by Sept. 22, Parés said.
The certificate will be valid starting Oct. 1 and should be printed out and placed in a visible location at the entrance of the establishment so customers can identify that the business is authorized to charge the reduced IVU rate.
“We urge those business owners who did not receive the certificate yesterday [Tuesday] and want to be able to charge the reduced rate starting Oct. 1, that they still have this week to catch up and apply for the certificate through their SURI account,” the Treasury chief said in the release, while stressing that uncertified establishments cannot charge the lower rate.
He urged business owners with questions to visit the agency’s website, www.hacienda.pr.gov, or call 787-622-0123, option 8.
Besides possessing a valid merchant registration with a qualifying NAICS code number, businesses wishing to obtain certification must be up-to-date in tax filings, including IVU filings, and not have outstanding tax debt or be participating in a tax-debt payment plan, Parés Alicea explained, adding that businesses must also have a fiscal, or point-of-sale, terminal that is connected to Treasury.
To qualify, the merchant registration must have at least one of the following NAICS codes: 72231, 72232, 72233, 72241 and 72251, the Treasury chief said, adding that businesses currently selling prepared foods with registrations lacking these codes should update them. Once businesses have complied with the requisites, they may apply for the certificate through SURI, he said, noting that these applications are evaluated daily.
Parés said the 7 percent IVU can only be charged by businesses that sell prepared foods, carbonated beverages, and candy and sweets, as defined in Section 4010.01 of the 2011 Puerto Rico Internal Revenue Code, as amended. He said alcoholic beverages are not included in this list.
Treasury had sent automatic notifications Aug. 9 to businesses that qualified under the NAICS code, apprising them of the requirements to obtain the certificate. Then, on Sept. 6, the agency sent more than 17,000 notifications to businesses that had yet to fully comply with the requisites to be able to offer prepared food at the reduced IVU.
Which establishments can charge the lower rate?
Pantojas said many of the eligible businesses that have not been certified failed to have a proper fiscal terminal installed. He said merchants, regardless of their aggregate sales volume, who lack a fiscal terminal should contact any of the 13 processing companies certified by Treasury and identified in Administrative Determination 19-03, which can be accessed online, at www.hacienda.pr.gov.
Pantojas said the monthly maintenance fee of such terminals comes out to $8 to $10 a month, although he could not provide a number for the initial investment businesses must make to acquire the equipment.
“This should not be an impediment given that this system has been established for a decade,” he said.
Another sizeable group of businesses have been unable to get certified because they have outstanding tax debts, Pantojas said, adding that these businesses can become eligible for the reduced IVU certificate as soon as they have agreed to a payment plan with Treasury.
“They don’t have to erase their tax debt to comply; they just have to have an up-to-date installment plan with us,” he said.
The procedure to reduce the current 11.5 percent IVU to 7 percent on prepared food is automatic for businesses connected to SURI and business owners don’t have to visit Treasury offices to get an update on the requirements, given that the messages that have been sent to their accounts explain the steps that must be taken to benefit from the adjustment of the IVU rate, Parés said.
Treasury estimates that the lower IVU rate on prepared foods will result in a decrease of approximately $90 million a year in revenue, Pantojas said. He added, nevertheless, that the reduced rate will encourage prepared food establishments to comply with IVU collections, which he said could increase Treasury’s ability to increase revenues in this tax category. These businesses will likely see a greater influx of costumers due to the lower tax, he said.
Despite governance crisis in July, Puerto Rico tax revenue exceeds projections
Treasury chief attributes record collection to corporate activity
SAN JUAN — The government crisis that led to the resignation of former Gov. Ricardo Rosselló in July did not affect the Puerto Rico Treasury Department’s tax revenue that month, which exceeded estimates and reached “historical” levels, Treasury Secretary Francisco Parés announced Tuesday.
Preliminary general fund net income during July, the first month of fiscal 2020, totaled $1.05 billion, some $305.5 million, or 41.2 percent, more than the same month last year, Parés said in a release, noting that the figure exceeded estimates by $159.9 million.
The Treasury chief attributed the month’s record-breaking revenue mostly to income tax collections resulting from “economic activity by corporations.” Corporations on the island paid $255.7 million in income taxes, nearly three times the $89.5 million paid the same month last year. July’s corporate income tax revenue exceeded projections by $101.9 million, or 66.3 percent. Parés simply said it was “attributed to a particular business transaction of a company that resulted in payment of taxes.”
Another big revenue driver was Act 154’s 4-percent excise tax, paid by stateside companies on their purchases from Puerto Rico-based subsidiaries, the official said. The hugely successful tax has become the focus of controversy after U.S. Treasury Secretary Steven Mnuchin reportedly told Gov. Wanda Vázquez’s administration to prepare for the eventual elimination of the federal tax credit that allows stateside manufacturers on the island to offset the impact of the excise tax. He said the tax does not align with President Trump’s corporate tax reform to bring business back to the United States. For tax purposes, Puerto Rico is considered a foreign jurisdiction.
The Act 154 excise tax generated $383.4 million in July, a 53 percent increase compared with the $250.1 million collected the same month last year. The July figure is $35.9 million above estimates, Parés added. Act 154 collections rose 8.8 percent, or $168.3 million, between fiscal years 2018 and 2019. Revenue in this category, which constitutes almost one-fifth of general fund revenue, rose from $1.68 billion in fiscal 2018 to $1.83 billion in fiscal 2019.
Individual income tax collections totaled $143.3 million in July, $13 million, or 10 percent, more than in July 2018. Revenue in this category exceeded estimates by nearly $8 million, Parés said.
However, Treasury also registered declines in other major revenue categories, including the sales and use tax (IVU by its Spanish initials). IVU collections totaled $91.6 million in July, a drop of $10.8 million, or 11 percent, compared with July last year, when Treasury received $102.4 million. The July figure was nearly $9 million below estimates.
IVU collections for July totaled $179.3 million, Parés said without providing the year-ago total. He said the method used to register IVU payments was modified in July due to the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) adjustment plan resulting from an agreement with bondholders in February.
“Under the new methodology, [IVU] payments received will be registered at the moment the tax return is filed,” the Treasury chief said. “For this reason, some payments made in the month of July will be reflected in the month of August starting on the 20th, the deadline for filing the monthly IVU return.”
Motor vehicle excise tax collections totaled $34.2 million in July, a $9.7 million drop compared with last year, but $10.5 million above estimates. Excise tax collections on alcoholic beverages reached $20.7 million, a $1.7 million decline versus July 2018, but $10.5 million more than estimated.
Meanwhile, non-resident withholdings fell 30 percent, from $51 million in July 2018 to $35.7 million in July this year. Estimates in this category were off by $17.5 million.
Parés said last month that projected tax revenue for fiscal year 2020 is expected to drop by nearly 9 percent due to the planned cut of the IVU on prepared food from the current 11.5 percent to 7 percent, which starts Oct. 1, as well as to enacted income tax cuts, and the earned-income tax credit.
Process to cut tax on prepared food to 7% begins
Puerto Rico Treasury to announce requirements shortly
SAN JUAN – Puerto Rico Treasury Secretary Francisco Parés Alicea announced that work has begun to ahead of a reduction of the sales and use tax (IVU by its Spanish acronym) on prepared foods that will come in effect in October.
“As determined in Act 257 of 2018, signed by Governor Ricardo Rosselló Nevares, on the New Tax Model, as of October 1 of this year, the IVU for prepared foods will be reduced from 11.5% to 7%. We have already started discussions with the Association of Restaurants of Puerto Rico (ASORE) to delineate the parameters of the implementation and orientation for the members of the industry,” the official said.
Parés and his team met Wednesday ASORE President José Salvatella to begin to discuss the requirements for the imposition and collection of the new rate.
“The reduction of the IVU on prepared foods will benefit both consumers and business people because we anticipate that this will be an incentive to increase visits to these establishments. Our work is focused on delineating an effective transition for all,” Parés said.
Treasury said it has begun drafting the official publications to inform of the requirements and the process that will take place in coordination with the sector. The secretary said ASORE will support the agency to provide guidance on the importance of catching up with all the requirements, using the Unified Internal Revenue System (SURI) and the changes that must be made to point of sale systems.
“Meanwhile, we urge business owners to make sure they are up to date with their tax responsibilities with the Department,” the official said.
“We have always believed in the complete elimination of this tax on prepared foods, but we recognize that this reduction will be beneficial for consumers, industry and the Treasury. We urge the owners of food establishments to be attentive to Treasury guidelines so they can implement this change effectively at their points of sale,” ASORE’s president said.
Restaurant and prepared-food establishment owners will also be able to learn about the requirements at the 360 Service Centers and Integrated Services Centers, as soon as the publications related to the change begin to be distributed.
In Treasury’s press release, the department’s new head said that after hurricanes Irma and María, the restaurant industry and establishments dedicated to the sale of prepared food, “showed that they are an important part of our economy.”
Puerto Rico Treasury: Net January revenue exceeded projections
Over $23 million more than forecast in October’s revised fiscal plan
SAN JUAN – Puerto Rico Chief Financial Officer and Treasury Secretary Raúl Maldonado Gautier announced Monday that net revenues to the island’s General Fund totaled $717.9 million in January.
“Compared to January 2018 revenues, there was $133.3 million net increase. January 2019 revenues were $188.3 million above the June 29, 2018 Certified Fiscal Plan projections and $23.5 million above the October 23, 2018 Certified Fiscal Plan revised projections,” Maldonado Gautier said, adding that “revenue behavior shows the Government has been meeting the revenue projections that were established,” the release reads.
Individual and corporate income taxes, the foreign corporations excise tax (Act 154) and the motor vehicle excise tax categories were the main revenue drivers.
Maldonado also pointed out that corporate income tax revenue totaled $95.1 million in January, a $31.1 million year-over-year increase, and $23 million more than revised projections.
“The Act 154 excise tax on foreign corporations totaled $61.8 million, that is, an increase of $3.2 million compared to the previous year. Revenues for this tax category are always lower in the month of January because several corporations reach the annual tax cap in previous months and, therefore, do not make payments in January,” he said.
The Treasury chief stressed that motor-vehicle excise tax collections continue to grow.
“These collections have been the highest every month of this fiscal year since 2006, that is, for the past 13 years,” Treasury said in its statement, quoting Maldonado as saying, “In January of this year, the revenue was $43.9 million, $3.0 million, or 7.3 percent, above last year.”
The sales and use tax (SUT, or IVU by its Spanish acronym) collections totaled $261.2 million.
“This amount was $34.7 million higher than SUT collections in January 2018 and similar to collections in January 2017. $193.0 million of total January SUT collections was distributed to the General Fund, $94.2 million more than in January 2018. This change is explained by the fact that distributions to COFINA [Spanish acronym for Sales Tax Financing Corp.] were completed in January, as opposed to last year when this occurred in February. As a result, revenues to the General Fund were higher. It is important to point out that the COFINA Adjustment Plan Agreement was approved by the Court on February 5, 2019, and therefore, does not affect revenues reported in January,” the Maldonado explained.
Fiscal year-to-date (July-January) net revenue totaled $5.12 billion, an increase of $902.6 million, or 21.4 percent, year-over-year, “which was affected by the passage of Hurricanes Irma and María,” the release reads, adding that “fiscal year-to-date revenues were $950.5 million above original projections and $141.4 million above revised projections, which is attributed, in turn, to the economic recovery after the passage of the hurricanes.”
Treasury added that on Dec. 10, the second phase of the Internal Revenue Unified System’s (SURI by its Spanish acronym) implementation went into effect. Taxes collected through SURI are withholdings at source, licenses, SUT and excise taxes. January was the first full month under the new system.
However, compared with the revised certified fiscal plan’s projections in October, individual income tax revenue fell short by $27.8 million, as did non-resident withholdings, by $35.8 million; the sales tax, by $16 million; the tax on tobacco, by $23.5 million; and the rum tax, ny $9.4 million.
Creditor group presses Puerto Rico fiscal board to reveal avoidance claims
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.
Puerto Rico Sales Tax Financing Corp.’s debt exchange put into effect
SAN JUAN – As previously reported, the plan of adjustment of the Puerto Rico Sales Tax Financing Corp. (Cofina by its Spanish acronym) that was confirmed in federal court Feb. 5, came into effect Wednesday, with the issuance of about $12 billion of new sales tax revenue bonds.
The island’s financial oversight board also officially announced that it unanimously certified Monday, Feb. 11, the fiscal year 2019 budget for Cofina, which “includes funds to cover COFINA’s past and future operating expenses.”
Cofina debt adjustment plan slated to go into effect Tuesday
SAN JUAN – The congressionally established Financial Oversight and Management Board intends for the debt adjustment plan of the Puerto Rico Sales and Use Tax Financing Corp. (Cofina by its Spanish acronym) to be put into effect as early as Tuesday, Feb. 12, about a week after the U.S. District Court gave it the green light.
The Electronic Municipal Market Access (EMMA) system, which is operated by the Municipal Securities Rulemaking Board, stated there will be two Cofina issuances that were dated Feb. 12. The first is Class 2047, which has a maturity date of Aug. 1, 2047, and the second is Class 2054, with Aug. 1, 2054, as its maturity date.
According to the debt adjustment plan, which was affirmed Feb. 5, Cofina and Reorganized Cofina, as the case may be, are authorized to make distributions and issuances as required under the plan and to enter into any agreements and transactions.
Recently enacted bond legislation amended the existing Cofina legislation to establish an independent Cofina board, permit the sales tax, tax exemption, substitution of “new collateral and non-impairment provisions,” among other things, and grant other authorizations required to implement the transactions.
The island’s fiscal board, however, already said last week it was seeking to implement the debt adjustment plan as early as Feb. 12. The information is contained in an urgent request for approval of a settlement between Cofina and Goldman Sachs Bank arising from a swap agreement.
The dispute needed alternative handling, which was provided through the debt adjustment plan. On Feb. 7, days after the court entered an order confirming the plan, Cofina and Goldman Sachs Bank reached an agreement resolving the dispute. Specifically, they agreed the swap agreement will be deemed rejected, Goldman Sachs Bank shall be entitled to liquidate and apply the collateral in “partial satisfaction” of the claim, and Cofina will pay $11 million to the bank.
“Approval of the Stipulation and Order is a matter of extreme urgency. The Oversight Board intends for the Plan to go effective as early as February 12, 2019. If the Stipulation and Order is not approved by this Court prior to the Effective Date, Cofina will be forced to reserve approximately $20 million in Cofina Bonds and cash from the Senior Cofina Bond Distribution, an amount equal to approximately 93% of GS Bank’s asserted Claim in excess of the Collateral.
“Given the relative insignificance of such amount compared to the aggregate allowed amount of approximately $7.7 billion of Senior COFINA Bond Claims, it would be a logistical impossibility to redistribute any amount wrongfully reserved from the Senior COFINA Bond Distribution in the likely event that GS Bank’s Claim is disallowed in whole or in part,” the motion says. As a result, the board requested expedited handling of the request.
The restructuring of Cofina’s $17 billion debt 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.
Majority of Cofina Bondholders Agree to Debt Deal
The Charging Bull statue in Lower Broadway in New York (CB photo)
The Financial Oversight & Management Board (FOMB) for Puerto Rico announced this week that the voting process for the Title III Plan of Adjustment of the $17 billion debt of the Puerto Rico Sales Tax Financing Corp., known as Cofina by its Spanish acronym, has been accepted by a majority of the bondholders.
That does not mean the deal will automatically go through because U.S. Judge Laura Taylor Swain on Jan. 16 must evaluate whether it complies with the federal law Promesa. She is also slated to hear objections that may result in changes to the plan. Nonetheless, the board and sources close to the deal assured Swain will give the green light to the plan.
In a statement, the Oversight Board said that based on unaudited voting results, all classes of senior and junior Cofina bondholders had “accepted the Plan of Adjustment by overwhelming numbers.”
The Oversight Board further indicated that more than 8,000 bondholders returned ballots, thereby establishing the success of the solicitation process and the widespread support for the restructuring.
“The Cofina Plan of Adjustment, and the compromises of the many issues involved, is another step in helping set Puerto Rico on the road to recovery. We are confident the transaction will be approved at the confirmation hearing and that this important restructuring can be consummated shortly thereafter,” said Oversight Board Executive Director Natalie Jaresko.
The Cofina debt-adjustment plan agreed to last year 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, that is 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.
There have been objections raised to the plan, including that debt-service payments are slated to increase, and it could lead to another default.