Puerto Rico will likely need to fund government operations using sales-tax revenue claimed by warring factions of bondholders unless a legal dispute at the heart of the island’s bankruptcy is resolved by November.
The federal oversight board charged with restructuring Puerto Rico’s $74 billion debt asked a judge to let the board appoint two independent agents to help litigate a dispute over who owns cash collected by the government’s sales tax agency, known by its Spanish acronym Cofina. In court papers filed Saturday morning, lawyers for the oversight board said those agents should take over the fight currently being waged between general-obligation bondholders and Cofina bondholders.
The U.S. Bankruptcy Court in San Juan will decide who has control over $400 million of funds held by the sales-tax bond trustee. If the court rules that Puerto Rico doesn’t have claim to any sales-tax revenue, then the island will face “acute cash management issues” that may require it to borrow sales-tax revenue after Nov. 1 from the island’s sales-tax agency, the commonwealth said in the court documents.
“Time is of the essence to resolve the commonwealth-Cofina dispute because, if the commonwealth is not entitled to any of the pledged sales taxes, it will, absent borrowing or further slashing expenses to a counterproductive extent, face acute cash management issues shortly after" Nov. 1, according to the court filing.
Separate Agents
The oversight board sought to inject itself into the legal dispute between general-obligation and Cofina holders by appointing two agents to represent the conflicting interests of the commonwealth and the Cofina agency. The lead lawyer for the oversight board, Martin Bienenstock, argued in the motion that treating the commonwealth and Cofina as separate entities with separate agents would make it easier for the judge overseeing the island’s bankruptcy to decide who actually owns the sales-tax cash.
Some Cofina bond insurers have argued that Cofina needs to have an independent voice in the bankruptcy case. Bienenstock’s proposal would allow creditors to nominate as many as three potential agents for Cofina and as many as three for the commonwealth. But the oversight board would make the final decision on who to hire.
Puerto Rico is warning it may need sales-tax revenue two months earlier than usual. Sales-tax receipts begin flowing to the bond trustee on July 1, the start of its fiscal year, until January when the island’s general fund gets that money.
The commonwealth has $17.3 billion of sales-tax bonds outstanding and $17.8 billion of general obligation debt and agency bonds sold with the island’s general-obligation pledge. Those obligations account for about 55 percent of Puerto Rico’s debt.
Puerto Rico’s motion follows U.S. District Judge Laura Taylor Swain’s decision on May 30 to suspend payments to sales-tax bondholders until the parties resolve who has control of the $400 million of reserve funds.
