A restructuring deal for Puerto Rico Sales Tax Financing Corp. (COFINA) bonds took a step forward as it won conditional approval from unsecured creditors.
According to an August 2017 stipulation and order in the COFINA Title III bankruptcy, the Official Committee of the Unsecured Creditors had veto powers over any COFINA deal. The Unsecured Creditors' agreement Monday to back off a legal challenge removed a major hurdle for the largest of Puerto Rico's restructuring efforts.
The court treats the Unsecured Creditors as the Commonwealth Agent.
“The [Puerto Rico] Oversight Board is pleased to have arrived at a mutually agreeable solution with the Commonwealth and COFINA Agents to move forward the COFINA Settlement and Plan of Adjustment,” the Oversight Board said in an official statement. “This is definitely a positive step for Puerto Rico.”
Gregory Marose, a spokesman for the COFINA seniors, called it “a really big and positive development.”
The already negotiated COFINA deal reduces the claims of bondholders from having first claim on the proceeds of 5.5% sales and use tax to having first claim on 53.65% of this revenue stream. The deal affects $16.6 billion of bonds.
The Puerto Rico Oversight Board said this summer that with the proposed deal, if bond trustee money was included as the plan specifies, there would be recoveries of 93% for COFINA senior bondholders and 56.4% for COFINA subordinate bondholders.
In the proposed settlement, which requires approval by Title III Judge Laura Taylor Swain, the unsecured creditors agree to discontinue their legal challenge to the COFINA deal with the following exceptions:
First, assuming the judge approves the settlement, if the board approves a fiscal plan with a “material reduction of the 40-year cash flow projections” or amends or modifies two key documents in the COFINA deal in a way that negatively affects the interests of the commonwealth agent by Dec. 31, the commonwealth agent would have the right to file an objection to the deal.
Second, also assuming the judge approves the settlement, and assuming the same conditions except that they take place after Dec. 31 but before a hearing on the COFINA deal, the unsecured creditors would be able to seek relief from the court but the court wouldn’t be required to adjourn a scheduled COFINA deal hearing to consider the unsecured creditors concerns.
Third, assuming the judge were to reject the settlement, the unsecured creditors would be given three business days to file a challenge to the COFINA deal and until Nov. 16 to file an objection to a motion to resolve the COFINA dispute.
For the COFINA deal to move forward, the Puerto Rico Senate and House of Representatives will have to approve legislation. Normally, this would be done before the current session ends on Nov. 13 as they aren’t scheduled to return in session until early January.
Puerto Rico Fiscal Agency and Financial Advisory Authority Executive Director Christian Sobrino said last week that he doesn’t anticipate any problem with the legislature approving the deal.
If Swain ultimately approves the COFINA deal, it would be the first deal reached for bond debt owed by Puerto Rico’s central government.
Municipal bankruptcy expert James Spiotto said it was common practice in municipal bankruptcies for debtors to settle claims with those it believes to have stronger claims earlier in the bankruptcy. He said it is possible that the board believed the COFINA holders had a stronger claim than some of the other bondholders of Puerto Rico central government debt.
However, “This is just one piece of a mosaic of a debt restructuring,” said Spiotto, managing director at Chapman Strategic Advisors. “The other pieces have to fit in. Every journey starts with the first step.”
