Adoption of Wednesday's Puerto Rico Sales Tax Financing Corp. (COFINA) deal isn’t certain, analysts said.
Even as Puerto Rico bonds rallied following the announcement, analysts said holders of the commonwealth’s general obligation bonds may attempt to derail the agreement.
A spokesman for the Ad Hoc Group of General Obligation Bondholders, contacted Wednesday evening, said the group had no comment on the deal.
“Will the [GO] holders insist on equal or better treatment based on what they believe to be their constitutional debt priority,” asked Howard Cure, Evercore director of municipal credit research. “And, will they contest the COFINA restructuring if they don’t receive a higher recovery percentage than COFINA?”
Puerto Rico Attorney John Mudd wrote in his Control Board Watch blog, “A big question will be what the GOs do, if anything … We should assume the confirmation of the COFINA plan of adjustment will be challenged in the commonwealth Title III confirmation hearing. Although I am sure Judge [Laura Taylor] Swain will sweep aside any objections, the First Circuit [of Appeals Court] may not.”
The GO holders have been trying to get Swain to declare all the sales and use tax money – which is used to pay the COFINA bonds – available resources to pay their GO bonds. Swain has yet to rule on this claim.
A spokesman for the COFINA Senior Bondholders said he was confident the Swain would approve the deal.
On the plus side for the future of the deal, Cure said, “I think the significance with the COFINA restructuring over [that of Puerto Rico Electric Power Authority] is that it seems as if COFINA also has the approval of the bond insurers, which is critical in any commonwealth sector that carried bond insurance.”
According to a spokesman for the COFINA Seniors group, a majority of all holders of the classes of COFINA bonds support the deal. On Thursday Assured Guaranty released a statement saying it supported how the deal would divide the sales and use tax revenue between senior and subordinate bondholders.
However, Assured Guaranty said in a statement to The Bond Buyer, “we reserve all rights and, in fact, object to the commonwealth’s contention that SUT revenues that are not being used for the new COFINA settlement bonds can be used in any other manner than in accordance with the priority of payments prescribed by the commonwealth’s constitution, which prioritizes the commonwealth’s public debt payments first, and is supported and protected by PROMESA," the Puerto Rico Oversight, Management, and Economic Stability Act.
On Thursday Puerto Rico Oversight Board Executive Director Natalie Jaresko said the board’s goal was to have a court-approved plan of adjustment for COFINA by the end of the year.
She said that she was encouraged that roughly $30 billion of the roughly $74 billion of Puerto Rico par value in debt is now covered by negotiated deals. Though none of the deals have been legally adopted, this is progress from several months ago, she said. The entities with preliminary deals are PREPA, the Government Development Bank, and COFINA.
The announced deal would allot 53.65% of the pledged sales tax base amount cash flow through 2058 to new COFINA bonds. It would require existing bondholders to give up their bonds for new bonds with different maturities and coupons. Money held at the bond trustee would be distributed to bondholders. When this money is added, senior bondholders would have a 93% recovery and subordinate bondholders would receive a 56.4% recovery.
Senior bonds would be replaced by COFINA current interest bonds maturing in 2028, 2032, 2038, and 2043 or a capital appreciation bond maturing in 2058. Holders of COFINA bonds would generally get an equal distribution of these five types of bonds.
The yields on the new current interest bonds would vary from 4.35% to 4.6%. The CAB would have a 5.5% annual yield. The 2028 bonds would not be callable. The other bonds would be callable on set dates, with the earliest being on 2025.
The first sinking fund payment on the CAB is to begin on 2043. This is to have an initial value of $2.7 billion and an accreted value of $15.4 billion.
The new deal allows for the commonwealth to sell additional COFINA subordinate bonds under certain conditions.
The deal also says that the pledged sales and use tax for the bonds could be reduced further as long as ratings agencies didn’t lower the ratings on the bonds below A2 or A and the pledged sales and use tax isn’t lower than 3%. The board or the commonwealth government could also substitute the collateral for the bonds under certain circumstances.
There would be a 2% charge on the existing par value. This will be distributed to two parties: the first being those who have actively worked on the court process for COFINA bonds and the others being retail bondholders on the island. The latter group could not extend beyond $1 billion in personally held par value.
Gov. Ricardo Rosselló said that the agreement would “represent a reduction in the aggregate debt of COFINA of approximately one third of the COFINA debt, savings of $17.5 billion in future debt service payments.”
The parties will next have to create a restructuring support agreement that will spell out in detail the terms of the agreement. Oversight Board will move from that to create a plan of adjustment for COFINA. As part of the Title III process the board would submit the plan to Swain.
Observers have differing opinions as to how much flexibility she has in deciding whether to approve the plan.
On March 29 Chairman of the U.S. Committee on Natural Resources Rob Bishop sent a letter to board Chairman José Carríon saying, “To date, the committee has been unsatisfied with the implementation of PROMESA, and the lack of respect for the Congressional requirements of the fiscal plan.” In particular he said, “I remain frustrated with the Oversight Board’s inability and unwillingness to reach consensual restructuring agreements with the holders of Puerto Rico’s debt.”
On Aug. 6 Mudd wrote in his Control Board Watch blog, “it definitely seems like there is movement due largely to rising political pressures on the Oversight Board and the governor from Washington.” He went on to specifically say that a COFINA deal appeared to be near. “My sources tell me that [the governor at his office of] Fortaleza will sign up to the deal, as the governor desperately needs a win in the face of non-existent credibility outside of Puerto Rico in the lead up to his 2020 re-election campaign.”