COFINA agrees to 46.35% less in future revenue

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A Puerto Rico Sales Tax Finance Corp. (COFINA) lawyer has agreed to accept 46.35% less in future sales and use tax revenue for the COFINA bonds.

In addition to retaining the first 53.65% of the pledged sales tax base amount for payment of the bonds, if the deal goes forward COFINA bondholders would retain everything that has been deposited into the bond trustee’s bank account since May 2017. Since that point the money normally allocated for the COFINA bonds has been held there and not distributed.

As of June 8 the Bank of New York Mellon COFINA account held $1.2 billion, according to an industry source.

On Thursday night the lawyer, Bettina Whyte, announced the terms of the deal with the “Commonwealth Agent,” appointed by the Puerto Rico Oversight Board. The board authorized the Unsecured Creditors Committee to serve as the Commonwealth Agent. Paul Hastings attorney Luc Despins represented this side in negotiations.

“The COFINA agent is pleased to have reached an agreement in principle to resolve the Commonwealth-COFINA dispute in an amicable and equitable manner with the Commonwealth Agent,” Whyte said Thursday evening.

On Tuesday evening, a representative of the COFINA Seniors Bondholder Coalition said something similar. “It is an extremely positive development for Puerto Rico and its citizenry that the court-appointed agents have reached a negotiated settlement ahead of a litigated outcome,” said Matt Rodrigue, Miller Buckfire & Company financial advisor to the COFINA Seniors.

According to the March 13, 2017 board-approved Puerto Rico fiscal plan, there was a total of $17.6 billion in COFINA bonds outstanding as of February 2017. An industry source said the deal effectively forgave about $6 billion of this debt.

The deal doesn’t set the allotment of revenue between the COFINA Seniors and the COFINA Subordinate bonds and doesn’t set haircut levels for either of these bonds. “The division of value allocated to COFINA among its creditors will be determined in future negotiations over the COFINA Title III plan of adjustment to be filed by the [Oversight Board] to implement the settlement agreement,” said a press statement from Whyte.

Interest rates would probably be reduced to around 5%, the industry source said. The maximum maturity of the new bonds will be 40 years.

The terms of the deal are binding on parties to the Title III bankruptcy now that the two sides have agreed to them, the industry source said. The August 2017 court stipulation and order that set the negotiations running said the parties can object to the scope of the agreement as being overly broad but can’t object to the terms, once agreed to.

However, the agreement is contingent on Title III judge Laura Taylor Swain approving it as part of a wider plan of adjustment for Puerto Rico’s debt.

Swain was aware of the agreement at Wednesday’s Title III omnibus hearing. According to Reuters, she said, “I am pleased with the settlement agreement... It is an enormous significant development.”
The deal hasn’t yet been executed since definitive documentation hasn’t yet been established. The agreement provides a 60 day period for this.

According to the proposed terms the deal must also be approved in a plan of adjustment within 200 days of its execution unless the Commonwealth Agent agrees to extend the deadline in certain specified ways.

In mid-May the COFINA Seniors and the GO bondholders announced a proposed agreement. The board and Puerto Rico’s government quickly rejected the terms. Puerto Rico’s Fiscal Agency and Financial Advisory Authority said its “debt service requirements are not sustainable in light of Puerto Rico’s projected fiscal and economic situation.”

On Friday the board declined to comment. FAFAA didn’t respond immediately to a request for a comment.

On Friday Assured Guaranty Managing Director Robert Tucker said, “Assured Guaranty is reviewing the term sheet and continues to maintain that commonwealth General Obligation bonds have a senior payment priority ahead of all other government expenses as clearly specified in the Puerto Rico Constitution and recognized in [the Puerto Rico Oversight, Management, and Economic Stability Act].

“We continue to believe the settlement agreed to by the Ad Hoc GOs and Senior COFINAs on May 14th represents the best path forward to achieve a successful, non-litigated settlement of the Commonwealth-COFINA dispute. We look forward to working with the Commonwealth Agent, COFINA Agent, mediation team and other stakeholders in good faith to reach common ground on settlement terms and to consensually resolving the Commonwealth-COFINA dispute,” Tucker said.

In afternoon trading on Friday, the COFINA Series 2007B revenue 6.05s of 2036 traded at a high price of 84.25 cents on the dollar compared to 79.5 cents on Thursday, according to the Electronic Municipal Marketplace Access website. Volume totaled $62.38 million in 87 trades compared to $25.84 million in 77 trades on Thursday.

The COFINA Series 2010C first subordinate capital appreciation bonds of 2037 traded at a high price of 10.9 cents on the dollar on Friday compared to 6.951 cents on May 30, according to EMMA. Volume totaled $26.45 million in 10 trades compared to $200,000 in two trades on May 30.

Chip Barnett contributed to this story.

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