COFINA deal currently lacks needed support

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The Puerto Rico Sales Tax Financing Corp. (COFINA) bond restructuring agreement, which triggered a rally in the bonds when it was announced by the Oversight Board earlier this month, may lack the necessary support to go forward.

Lawyers for the court-designated “Commonwealth Agent” – the Official Committee of Unsecured Creditors – submitted an informative motion Monday in one of the Title III adversary proceedings indicating that neither the Commonwealth Agent nor one of the two Commonwealth Creditor Representatives currently support the deal. Paul Hastings Partner Luc Despins leads the group of 10 lawyers who submitted the motion. The unsecured creditors and the retirees say the Oversight Board must certify a fiscal plan with more revenue before they will approve the agreement.

“This filing is indicative of the difficulty in taking a piecemeal approach to settling various obligations of the commonwealth (including debt, pension, [Other Post-Employment Benefits], labor, and municipal aid)," said Howard Cure, director of Municipal Bond Research at Evercore Wealth Management. "A more holistic approach by the Oversight Board to settling the debtor and employee disputes would be preferable while getting a consensus agreement on the cash flow projections going forward.”

Title III Puerto Rico bankruptcy Judge Laura Taylor Swain stated in an Aug. 10, 2017, stipulation and order that the “Commonwealth Agent” and one of the two “Commonwealth Creditor Representatives” must approve any COFINA bond restructuring deal. About $17.5 billion of COFINA bonds and $13.3 billion of Puerto Rico general obligation bonds are in Title III bankruptcies.

The Puerto Rico Oversight Board said that with the proposed deal, including the distribution of bond trustee money would lead to recoveries of 93% for COFINA senior bondholders and 56.4% for COFINA subordinate holders. These levels were well above where the bonds had been trading in the secondary in recent weeks and led to their rally.

On Wednesday bond trading in COFINA subordinate bonds were 4 to 5 cents on the dollar weaker than on Aug. 9, the day after the deal was announced.

In its filing the Commonwealth Agent said that the COFINA deal was based on the cash flow projected by the board’s May 30 certified plan. The “revised assumption in the June 29, 2018 certified fiscal plan result in a significant cash flow deficit (when including the COFINA debt service payments under the contemplated settlement) in the aggregate amount of approximately $28 billion (in nominal dollars).”

“The Commonwealth Agent believes that this Commonwealth feasibility issue needs to be resolved prior to execution and/or consummation of a settlement agreement,” the Commonwealth Agent lawyers wrote. They say the Commonwealth Agent could support an agreement whose consummation was conditioned on the board certifying a plan with the same amount of net cash flow over the next 40 years as the May 30 certified plan contained.

The board has said it is planning to revise its June 29 fiscal plan but has declined to say whether it expects the net cash flow available for paying debt service will go up or down. The board declined to comment for this story.

The Commonwealth Agent said the Official Committee of Retirees, one of the Commonwealth Creditor Representatives, doesn’t support the agreement.

The Ad Hoc Group of GO Bondholders and Assured Guaranty Corp. appointed the other Commonwealth Creditor Representative. While Assured has expressed its support for the COFINA deal, the GO group has declined to comment on it.

The Official Committee of Unsecured Creditors represents non-bondholding creditors to Puerto Rico. While the court has designated it the “Commonwealth Agent,” the group represents neither Gov. Ricardo Rosselló nor the Oversight Board.

The Commonwealth Agent lawyers say the agent is open to supporting the deal if conditions change and says that Official Committee of Retirees has the same attitude. The Official Committee of Retirees declined to comment on its position Wednesday.

The Commonwealth Agent's filing "puts the whole COFINA agreement in jeopardy," said John Mudd, a Puerto Rico attorney who represents a municipality in the main Title III case.

The Ad Hoc Group of COFINA Seniors didn’t see it this way. “The agreement reached by COFINA creditors, the board, and the local government is a major step forward for the commonwealth on its road to recovery…. We’re confident that any substantive concerns raised by relevant parties will be addressed before confirmation.”

On Wednesday one holder of COFINA senior bonds expressed his opposition to the deal. Glenn Ryhanych, president of BlueList Partners, LLC, said COFINA senior bondholders should reject the deal because they won’t truly receive a 93% recovery, a recent U.S. Court of Appeals decision strengthens the legal standing of the COFINA seniors, the COFINA Seniors have a stronger position in the Puerto Rico Constitution than the GO holders, and the settlement is based on overly pessimistic projections of sales and use tax collections.

Municipal bankruptcy expert and Chapman Strategic Advisors Managing Director James Spiotto emphasized the power and flexibility of the court in considering approval of the deal.

“Generally in bankruptcy, settlements are approved if there is a likelihood of success on the merits of the issue being settled and the settlement is within the range of reasonableness," he said. "The COFINA settlement for these reasons and given the support of the commonwealth-related parties may likely obtain approval of the court.”

Chip Barnett contributed to this story.

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PROMESA Puerto Rico Sales Tax Financing Corp (COFINA) Commonwealth of Puerto Rico Puerto Rico Employees Retirement System Puerto Rico Infrastructure Financial Authority Puerto Rico
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